Forecasting a fate for Indian Rupee, Shinhan Bank, a premiere South Korean Investment Bank, has said that USD/INR is expected to weaken in the first half of 2023, due to economic slowdown but is likely to rebound in the second half. The expected annual range for USD-INR is 77-84.5, says the bank in its recently published report. Despite weakness in currency, the report believes that India may attract Foreign Direct Investment (FDI) worth $475 billion in next five years due to institutional and policy reforms initiated by the government.
Due to the unstable external factors including continued strong dollar and global economic slowdown, USD/INR is expected to receive upward pressure. However, slowdown in U.S. Federal Reserve’s rate hike may trigger downward movement of USD/INR in second half of the year, the report says. In 2022, the foreign exchange (FX) rate weakened as USD/INR rose above 80 level due to the Fed’s aggressive tightening and strengthening of the US dollar.
Apart from external factors, the bank also cited India’s deteriorating fiscal condition for weakness in Rupee. The report states that as subsidies increased in order to defend this year’s high inflation, fiscal spending also increased, enlarging the fiscal deficit. If it continues, FX market supply will worsen, since India is a structurally current-account deficit country that will put downward pressure on rupee, the report says.
India may grow at a slow pace
The report cites a previous IMF forecast that expected the global economic growth in 2022 to be 3.2%, and 2.7% in 2023.
In line with slowing global growth, India’s economy is also expected to slow down in 2023, accelerating the global economic slowdown as the aftermath of the Russia-Ukraine War and global monetary policy tightening. India’s economy is expected to grow 6.8% in ‘22 and 6.1% in ‘23. Despite downward revision of 2022 outlook, India’s economic growth is comparatively higher than other major Asian countries.
Explaining the reasons behind slow pace of India's growth in 2023, the report says that a slowdown on a year-on-year basis is inevitable as corporate investment and household consumption are expected to shrink due to increased borrowing costs. Also exports are expected to decrease due to falling external demand, and expanded trade deficits.
But behind the gloom and doom, there are many silver linings too, like the rising Foreign Direct Investment and buoyant stock market.
The report says that despite the pandemic and the Russia-Ukraine War, FDI in India increased consistently, recording $84.8 billion in FY22.
The government is carrying out policies and institutional reforms and initiated steps like digitalisation of private sector, numerous tax incentives and tax cuts, modernisation of tax policy and administration, and infrastructure development in order to reinforce investments. If the government continues to concentrate on such reforms and economic growth, FDI is expected to reach $475 billion within the next 5 years.
Also, foreign capital inflow into India is expected to increase due to factors such as supply chain rearrangement intensified by the U.S.-China conflict, relaxed investment regulations etc. that would increase the attractiveness of the Indian market.
Shrinking forex to fight soaring dollar
Global foreign exchange reserves fell by more than $1 trillion since the beginning of the year due to global central banks’ continuous intervention in the market to defend their currencies under the strong global US dollar. India’s foreign exchange reserves plunged 10% compared to the beginning of the year, but it is still sufficient enough as a buffer for exchange rate volatility and to merit the 5th rank, globally. But, foreign exchange reserves in emerging countries, except Middle Eastern oil exporting countries and South American countries, showed the most serious decline since the financial crisis in 2008. In case of the prolonged decrease in the foreign exchange reserves, emerging currencies may depreciate further and lead to chain crisis, the report states.