New Delhi: The Indian rupee is set to end a tumultuous year as Asia’s worst-performing currency with foreign funds fleeing the nation’s stocks. The currency declined 2.2% this quarter as global funds pulled $4 billion of capital out of the country’s stock market, the most among regional markets where data is available.
Foreigners sold Indian stocks as Goldman Sachs Group Inc. and Nomura Holdings Inc. recently lowered their outlook for equities, citing lofty valuations, at a time when concerns about the omicron virus variant are roiling the global markets. Record-high trade deficit and the central bank’s policy divergence with the Federal Reserve have also impinged on the rupee’s carry appeal.
“The monetary policy divergence and widening current account gap have set depreciation in the rupee in the near term,” said B. Prasanna, head of global markets, sales, trading and research at ICICI Bank Ltd in Mumbai.
Depreciation in rupee is a double-edged sword for the Reserve Bank of India. While a weaker currency may support exports amid a nascent economic recovery from the pandemic, it also poses risk of imported inflation, and may make it difficult for the central bank to maintain interest rates at a record low for longer.
QuantArt Market Solutions expects the rupee to decline to 78 per dollar by end-March, falling past the previous record low of 76.9088 reached in April 2020, while a Bloomberg survey of traders and analysts forecast the rupee at 76.50. The rupee is set to drop about 4% this year in a fourth straight year of losses.
Stocks on The Edge
Foreign exodus from stocks have led to the benchmark S&P BSE Sensex Index falling by about 10% below an all-time high touched in October. Despite that, the one-year forward price-to-earnings ratio for the Sensex is near 21, compared to 12 for MSCI’s Emerging Markets Index, meaning there’s room for the equities to fall even further. Bonds have seen $587 million of outflows this quarter.
