Rising trade deficit along with prospects of a rate hike by the US central bank (Federal Reserve or Fed) is expected to subdue the Indian rupee during the upcoming week.
Accordingly, the rupee is expected to range from 73.80-74.70 to a US dollar. Last week, rupee had closed at Rs74.14 to a US dollar before hitting a low of 73.70.
Rupee under pressure
"Rising trade deficits of $21.7 billion for December should keep rupee under pressure," said Sajal Gupta, Head, Forex and Rates at Edelweiss Securities.
"Besides, US Fed's commentary of rate hikes in 2022 shall also be a damper for rupee and other emerging market currencies. Lesser number of IPOs in the coming fortnight can also be a factor for rupee weakness ahead," Gupta added.
Notably, a rate hike by the US Fed can potentially drive away Foreign Institutional Investors (FIIs) from India and other emerging markets.
On the trade front, deficit widened by 37.92 per cent on a year-on-year basis to $21.68 billion in December 2021 from $15.72 billion in the like period of 2020. It had widened to $12.49 billion in December 2019.
Worst among Asian peers
"India rupee has become the worst performing currency among Asian basket amidst back of surging trade deficit and inflation," said Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities.
"Rupee is having strong support around 73.80 while resistance will be in the range of 74.40 to 74.70," Vakil added.
According to Gaurang Somaiya, forex and bullion analyst, Motilal Oswal Financial Services: "At the start of the week, China's GDP number is scheduled to be released and that could set the tone for the week.
"We expect the momentum for the USD-INR would continue to remain positive and it could quote in the range of 73.70 and 74.50."
Still optimistic
Investors switched to long positions on India's rupee for the first time since September, on hopes that the economy may be able to withstand the worst of the Omicron surge and bets that US rate hikes are largely priced in, a Reuters poll found.
Broadly, investors stayed bearish on most Asian emerging currencies, the poll of 12 respondents showed, as the spread of Omicron threatens to slow the region's recovery, although, so far, emerging equities have remained fairly resilient.
High inflation in the US may also prompt the Federal Reserve to hasten its interest rate hikes, with the central bank signalling in December that they could raise rates three times this year.
"Although these are headwinds, we do not think the market is overly complacent as risks are likely to be moderate (Omicron) and/or have been largely priced already (Federal Reserve)," analysts at Barclays said earlier this week.
Omicron worries
So far in India, which is in the midst of a third wave of the COVID-19 pandemic, states have imposed some restrictions on daily life, but have not enforced economically damaging lockdowns seen in previous waves.
Asia's third-largest economy grew at the fastest pace for any major economy between July and September, as businesses reopened and government spending strengthened.
Barclays added that it does not see tighter Fed policy, led by US growth outperformance, driving sustained dollar strength, and remains long on the rupee. The rupee has appreciated close to 3 per cent since mid-December.
