USD/INR: dramatic events Bollywood would envy

The Indian rupee has lost 11% to the US dollar since the beginning of 2022. It’s not great, but many analysts consider that the USD will weaken in the next year. So, it’s logical that right now is a good time to buy the rupee. Or is it….?

The US dollar is one of the strongest players on the markets in 2022. Multiple factors have led to this — the military conflict between Russia and Ukraine, rising prices everywhere and the energy crisis amongst others. There are perfect conditions for the USD to become a safe haven. 

When all markets are falling and a local currency doesn’t seem like even a defensive asset, people buy the USD. Especially, in a situation where the Fed has pushed rate hikes hawkishly and has made the dollar more and more attractive. Every such movement creates the potential for profit for traders — they can monitor important economic events using the economic calendar.

The US dollar has increased by more than 7% compared to major currencies since the beginning of the year. At its peak, this number was about 18%. However, the gap has decreased after rumors that the Fed will slow down its hikes.

At the same time, the rupee’s value is affected by the energy crisis too — in a strictly negative way. India is a large importer of natural resources such as crude oil. Therefore, the growth of prices on resources weighs on the INR. Even despite discounts to oil importing from Russia.

The rupee has lost 11% to the USD, as a result of India using currency interventions to keep the INR’s position.

So, we’ve analyzed what was going on with the USD/INR pair in 2022. But what’s next? On the one hand, it’s unlikely that the crisis will end soon. It’s sad, but true. In fact, the situation could become even worse — and many countries could bring in the new year with recession. This means the USD will continue to be a safe haven. 

However, experts also predict that the Federal Reserve isn’t going to increase the interest rate actively, so the US dollar may actually have weakened by the end of 2023.

The rupee will likely see another year of underperformance. The energy crisis will continue to weigh on the currency, along with rising prices for resources. Powerful exports and poor imports are not a great combination for the INR. 

In addition, remember the Reserve Bank of India’s interventions to save the rupee. It decreased the country’s foreign currency reserves, so it’s unlikely that India will repeat interventions without extreme necessity. 

All these factors take shape in a simple average forecast. The balance between the USD and the INR probably won’t have changed drastically by the end of 2023. But, of course, experienced traders and investors will be able to find their own opportunities to profit from it.