Indian Rupee to End Year as Asia’s Worst Performing Currency | Business and Economy News
Foreigners have sold $4 billion worth of shares as concerns over the Omicron virus variant disrupt global markets.
The Indian rupee is set to end a tumultuous year as Asia’s worst performing currency as foreign funds flee domestic equities.
The currency fell 2.2% this quarter as global funds withdrew $4 billion in capital from the country’s stock market, the most among regional markets where data is available.
Foreigners sold Indian shares as Goldman Sachs Group Inc. and Nomura Holdings Inc. recently lowered their outlook for the shares, citing lofty valuations, at a time when concerns over the omicron virus variant are stirring global markets. The record trade deficit and central bank policy divergence with the Federal Reserve also eroded the rupee’s carry appeal.
“The divergence in monetary policies and the widening current account gap have led to a depreciation of the rupee in the short term,” said B. Prasanna, head of global markets, sales, trade and research at ICICI Bank Ltd in Mumbai.
Rupee depreciation is a double-edged sword for the Reserve Bank of India. While a weaker currency may support exports amid the nascent economic recovery from the pandemic, it also poses the risk of imported inflation and may make it difficult for the central bank to keep interest rates at record highs for longer. .
QuantArt Market Solutions expects the rupee to drop to 78 to the dollar by the end of March, topping the previous high of 76.9088 set in April 2020, while a Bloomberg survey of traders and analysts predicted the rupee at 76.50. The rupee is expected to fall around 4% this year for a fourth consecutive year of losses.
Stocks on the edge
The foreign exodus from stocks led the benchmark S&P BSE Sensex index to fall about 10% below an all-time high reached in October. Despite this, the one-year forward price-to-earnings ratio for the Sensex is close to 21, compared to 12 for the MSCI Emerging Markets Index, meaning stocks may still fall. Bonds saw $587 million outflows this quarter.
Bearish calls for the rupee rise as India’s trade deficit widened to a record high of around $23 billion in November amid higher imports. The abundance of liquidity in the banking system, partly created by the RBI’s purchases of dollars, could make it difficult for the central bank to intervene to the same extent in 2022 to limit the losses of the rupee, according to Goldman Sachs.
However, not everyone is pessimistic. A likely reversal in foreign inflows in the next quarter due to stock sales in companies such as Life Insurance Corp. of India, billed as India’s largest initial public offering, could dampen the rupee, according to UBS AG.
The rupee gained 0.2% on Monday to 75.9163 to the dollar amid speculation that the central bank had intervened to limit the rupee’s losses.
Beyond the temporary surge in the dollar/rupee expected over the next four to six weeks, “we see the timing flows and favorable seasonality in the first quarter current account coming into play,” said Rohit Arora, market strategist Asian emerging markets at UBS. . “As long as oil remains subdued, the rupee should end the year below current levels, possibly in the 74-75 range.”