New Delhi: The Indian rupee suffered its worst performance since 2013 and among Asian currencies in 2022 as the dollar rallied over 11% in value due to the US Federal Reserve's aggressive monetary policy.

The rupee fell to 74.29 to end 2021 as the US dollar headed for its biggest annual gain since 2015. The rupee closed 2022 at 82.61 against the US dollar.

However, the Indian rupee fared better than some other major world currencies such as the Turkish lira and the British pound. The Reserve Bank has repeatedly had to draw money from its reserves as a result of foreign exchange market volatility caused by a rise in global oil prices following Russia's invasion of Ukraine, prompting policymakers to address imported inflation It was difficult.

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According to the Reserve Bank of India's Financial Stability Report, since mid-October, the rupee has recovered from the period of volatility experienced earlier this year and is trading relatively closer to its long-term trend.

The start of the Russia-Ukraine war in February, which disrupted global supply chains and increased inflation, was the primary cause of the year's currency market volatility.

Just as a serious geopolitical crisis gripped the world economy, the aggressive US Federal Reserve began raising rates to control inflation. Because of the dollar's status as a safe haven currency, there has been a sharp decline in foreign investment.

Higher crude oil prices in the international market also hurt the rupee. In 2022, foreign investors pulled out a net amount of Rs 1.22 lakh crore from Indian equity markets and over Rs 17,000 crore from debt markets as a result of aggressive rate hikes by central banks across the world. Indian policy makers faced a serious challenge as a result of imported inflation as a strong dollar hurt India's trade.

Though the RBI spent over $100 billion to prop up the falling rupee, it eventually reached the psychologically important level of 83 against the dollar. Although there is some hope for the year ahead in the rupee.

There are indications that the US Fed will reduce rate hikes in the coming year. Additionally, FII inflows have started picking up, and international investors still have faith in Indian markets.

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Besides, fall in global energy prices, solid fundamentals of the Indian economy and return of inflation to comfortable levels of the Reserve Bank will provide some strength to the rupee against USD.

According to Dilip Parmar, Research Analyst, HDFC Securities, the first half of 2023 is likely to be volatile due to Covid concerns, while the second half is expected to be relatively calm as inflation and interest rates have peaked.

"As per our forecast, the rupee will stabilize between 84 and 79 and may even depreciate slightly against the US dollar. In the past, whenever there was a depreciation of more than 10%, the following years have been relatively calm with average depreciation . About 2%," Parmar threw in.

The falling value of the rupee has resulted in concerns about the current account deficit, and this, along with a rising trade deficit, could put further pressure on the rupee in the future.

On January 3 (the first trading day of 2022), the rupee reached a flat closing price of around 74.28. On 24 February, the day the conflict between Russia and Ukraine began, it fell to 98 pence and has been falling ever since.

The rupee crossed the 83 mark for the first time on October 19 as a result of unabated foreign capital outflow, strengthening of the dollar in international markets, rising crude oil prices and risk aversion by investors.

According to Navneet Damani, Senior Vice President, Currency and Commodity, MOFSL, the main reason for the 10% fall in the rupee this year is the strengthening of the dollar.

“In 2022, the rupee and other major currencies experienced an average depreciation of more than 10%. However, active intervention by the RBI has brought down the volatility of the rupee.

While there has been some reduction in reserves, the central bank is now once again starting to build up its reserves, which will act as a safety net in uncertain times," he said.

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As central banks remain accommodative at the moment, Motilal Oswal Financial Services predicts that rupee volatility is likely to remain high next year. This would be positive for the dollar overall.

"We anticipate that USD-INR (Spot) may trade favorably and quote in the range of 81.50 and 84.50 in the coming quarter," he continued.

ICRA Chief Economist Aditi Nayar said trends in the dollar index and global sentiment are likely to dominate movements in the rupee, with the latter strongly influencing trends in FPI inflows.

In the final trading session of 2022, the rupee strengthened 26 paise to close at 82.61 against the US dollar as the American currency depreciated from its recent highs. The rupee had stabilised at 74.29 against the dollar as of December 31, 2021.\