Indian rupee
Indian rupee to turn increasingly volatile in 2022, but end the year higher: Here's why Image Credit: Bloomberg

Dubai: When it comes to sending money to India, it is vital to know whether it is currently an ideal time to remit. To understand whether it is or isn’t, one should first find out if your currency back home is expected to rise or fall in the days to come.

Here is an analysis of how the Indian rupee is expected to perform in the coming year, to help understand whether remitting money now is profitable or cost-effective, or should you wait it out for a few weeks for a better rate to come along.

Remittances to India from the UAE were seeing an uptick as remittance-beneficial rates were recorded in the past month. But how did the Indian rupee fare against its global peers in 2021? Will the currency strengthen or weaken in 2022, and why?

The Indian rupee fell in 2021, but bested its peers
In 2021, Indian rupee depreciated about 2 per cent against the US dollar, its fourth straight year in the red. But it outdid its peers such as Japan’s yen, South Korean won, South African rand and European Union’s euro, which depreciated by 11.5 per cent, 10 per cent, 8.5 per cent and 8 per cent respectively.

Against the UAE dirham, the Indian rupee closed the year on firmer footing, with the exchange rate at Rs20.19 for a dirham – the lowest it has been in December. This was a turnaround from earlier in the month, when the talk was that the rupee could drop past a new low of 21 to the UAE dirham.

Will the Indian currency rise or fall in 2022?

In light of abundant foreign exchange reserves in India and strong performance of the rupee vis-a-vis its global peers, the Indian rupee’s depreciation beyond Rs78 (Dh3.86) per US dollar in 2022 is unlikely, analysts at India-based lender and investment broker ICICI Direct Research evaluated in its recent note.

The Indian rupee started the year 2022 on a muted note at Rs74.43 (Dh3.68) against the greenback. The rupee’s new-found strength is attributed by analysts to the US dollar’s weakness, and that’s directly caused by the increased number of Omicron cases worldwide.

Indian rupee, Indian currency
Will the Indian currency rise or fall in 2022?

INR to rise amid Omicron, policy tightening

India-based forex traders said growing concerns over the Omicron variant of COVID-19 and its impact on economic recovery as well as firm crude oil prices weighed on the Indian rupee these past weeks.

The rupee is likely to not drop beyond the Rs78 (Dh3.86) level, but instead strengthen back to Rs72 (Dh3.56) levels, against the US dollar, in coming months as “India seems to be in a better position to withstand any major shock from monetary tightening”, the analysts added.

However, some analysts opine how the rupee will continue its stable run in the next few months and then drop to around Rs77 (Dh3.81) to the US dollar by September, expecting it to be 4 per cent weaker than the current level.

Why will the Indian rupee strengthen in 2022?

In its outlook for the Indian currency, the analysts added that that unlike 2013 when the rupee had depreciated drastically after the US Fed announced monetary tightening, India currently holds the fourth largest forex reserve in the world.

In this circumstance, the Indian rupee has better footing to handle volatility induced by the US central bank’s tapering. Let’s next breakdown how the US central bank tapering and India’s ample forex reserves affect the Indian rupee’s prospects in 2022.

What does it mean by US central bank’s tapering?
The US central bank revealed plans to tighten monetary policy at a faster pace in light of rising inflation risks. The US Federal Reserve had earlier decided to start tapering — which refers to a reduction in the amount of bonds it purchases — at a pace of $15 billion (Dh55 billion) every month.

However, with the identification of a new coronavirus variant and US inflation running above target, this pace is expected to be accelerated, as per the minutes from the Fed meeting of policymakers. Interest rates in the US is expected to be hiked at least thrice in 2022, by 25 basis points each time.
Indian rupee
Why will the Indian rupee strengthen in 2022?

How will US central bank’s tapering affect INR in 2022?

This meeting was seen as a sign that the lender might hike interest rates faster to cool inflation and this could lead other central banks in economies elsewhere to follow suit, Dubai-based forex traders noted.

With fresh liquidity infusions by the Fed to stop by March 2022, global liquidity could be impacted significantly in the coming months. The Bank of England followed the Fed by commencing interest rate hikes in December.

This made foreign portfolio investors (FPIs) in India nervous, resulting in outflow of Rs171 billion (Dh8.45 billion) from Indian stocks and Rs123 billion (Dh6.08 billion) out of Indian bonds.

Who are FPIs in India?
Individuals or entities who invest in foreign portfolios are known as foreign portfolio investors (FPIs). In the Indian context, FPIs refers to registered overseas investor groups which include foreign institutional investors (FIIs) and qualified foreign investors (QFIs).

Stronger forex reserves to buoy INR

India’s forex reserves are equal to about 12 months of import cover, the research report pointed. “Further, with stability in oil prices and import cover of more than 10 months, the rupee should have enough cushion to withstand external shocks,” the report further noted.

(Import cover is the number of months of imports that could be covered for by a country's international reserves. Import cover is an important indicator of the stability of a currency.) India’s total foreign exchange reserves are at $635 billion (Dh2.3 trillion) as on December 24, 2021.

How does forex reserves, trade deficit help forex rates?
Foreign exchange reserves are a nation's backup funds in case of an emergency, such as a rapid devaluation of its currency. Countries use foreign currency reserves to keep a fixed rate value, maintain competitively priced exports, remain liquid in case of crisis, and provide confidence for investors.

Reserves essentially act as a shock absorber against factors that can negatively affect a currency's exchange rate, so a nation's central bank uses its currency reserves to help maintain a steady rate, buying or selling depending on which direction they want exchange prices to go.

A trade deficit typically has the opposite effect on currency exchange rates. When imports exceed exports, a country's currency demand in terms of international trade is lower. Lower demand for currency makes it less valuable in the international markets.
India’s account balances ensure stronger INR

India’s account balances ensure stronger INR

India’s current account balance recorded a deficit of $9.6 billion (Dh35 billion) in second quarter as against a surplus of $6.6 billion (Dh24 billion) in first quarter. The central bank said that the deficit was mainly due to widening of trade deficit in the preceding quarter and an increase in investment income.

The analysts said that the balance of payment (BOP) remained in surplus on strong foreign direct investment (FDI or the investment in domestic companies and assets of another country by a foreign investor) inflows and narrower current account balance.

Balance of payment (BOP) is the balance of payments of a country is the difference between all money flowing into the country in a particular period of time and the outflow of money to the rest of the world.

How can increase in FDI affect the price of foreign exchange and export?
Increase in foreign direct investment will result in more supply of foreign exchange therefore, due to excess supply, price of foreign exchange will fall i.e. exchange rate falls which leads to appreciation of domestic currency.

INR to withstand economic recovery effects on INR?

This year, even if the trade deficit widens as the Indian economy reopens, strong inflows will keep the current account deficit in check, the analysts noted.

“As the economy goes back to normalcy exports should start rising, preventing a huge trade deficit even if imports recover further as economic activities pick up,” according to the report.

The Indian central bank has been active in the forex market and this is seen in forex reserves declining from $641 billion (Dh2.35 trillion) in October 2021 to $635 billion (Dh2.33 trillion) this month.

For instance, the rupee’s strength over the last two weeks of December is despite the November trade deficit expanding to $177 billion (Dh650 billion), the highest since June 2019 and a host of other negative factors.

Indian rupee falls 47 paise to 69.82 against US dollar in early trade
INR to be hit by frequent volatile spells in 2022

INR to be hit by frequent volatile spells in 2022

Although the Indian rupee fared better than its peers in 2021, it has been volatile for the currency in December.

The rupee has been under pressure since the November Fed meeting when it was first revealed that the taper schedule could be accelerated. It depreciated 2 per cent between mid-November and mid-December, but has recovered since then, strengthening to Rs74.5 (Dh3.7) levels, against the US dollar.

In the end of December, the Indian currency appeared poised to shatter the previous life-time low of Rs76.91 (Dh3.80), against the US dollar, recorded last April. But the central bank pulled the currency back from the brink and it seems set to close the year around Rs75 (Dh3.7).

Bottom line?

While a short-term crisis has been averted, the reasons behind rupee’s recent volatility — commencement of monetary tightening by the US Federal Reserve and other central banks worldwide — will continue to weigh on the Indian rupee in 2022.

Going ahead, the rupee is likely to continue facing pressure due to foreign portfolio inflows (FPI) outflows (explained above), expanding trade deficit (explained above) and strengthening US dollar.

The Indian central bank has been preparing for such a situation over the last one year, accumulating foreign exchange reserves since April 2020, using up the excess foreign portfolio inflows (FPIs) last year. This resulted in the forex reserves rising by $56 billion (Dh205 billion) or 33 per cent since last March.

The Indian central bank will face a tough task maintaining stability in the forex market this year and it remains to be seen how well the central bank combats the rupee volatility in 2022.