A Look at the Factors that shaped USD to INR Exchange Rate 2023-24

An exchange rate (also known as conversion rate) between two currencies is the rate at which one currency can be exchanged for another. Exchange rates play an important role during a country’s level of trade, which is critical to almost every free enterprise within the world today. Therefore, exchange rates are among the foremost monitored, analyzed, and governmentally controlled economic measures. Exchange rate matters not just on the large macroeconomic scene but also on a smaller one. It impacts the real return of an investor’s portfolio, the profitability of firms, growth of specific sectors amongst various other determinants of the economy.

Factors that affect Exchange Rates

The foreign exchange rate plays an important role in the economy of a nation. Factors that affect the fluctuation and variation in the exchange rates are

• Inflation Rates
• Interest Rates
• Country’s Current Account/Balance of Payments
• Government Debt
• Terms of Trade
• Political Stability and Performance
• Economic cycle (expansion, recession, peak or through)
• Speculation by the market participants, banks, importers and exporters etc.
• Effect of Crude Oil on the exchange rates

Performance of Indian Rupee in 2022?

The rupee declined over 11% in 2022, as it struggled against global developments.?

“While the Rupee has depreciated 8% year-to-date, the dollar index has appreciated 18% over the same period” added Krishnamurthy Subramanian, former chief economic advisor (CEA).

As close to reality as ever, currency wars are rife

Due to COVID 19 global pandemic, US Dollar to Indian Rupee exchange rate is at an all-time low. If the US dollar is stronger than the rupee, then it shows that the demand for US Dollars (by those holding Indian Rupee) is more than the demand for Indian Rupee (by those holding US Dollars). The rupee has been steadily losing value, showing the Indian economy’s reducing competitiveness, since July 2019. The dip in March 2020 was likely influenced by the net outflow of foreign portfolio investments from the Indian equity and debt markets; they stood at $15.92 billion in March as against net inflows of $1.27 billion in February. After fresh escalation within the US-China trade tension, the Chinese government depreciating its Yuan, and therefore the US President Donald Trump levying duty on the Chinese imports, the emerging economies are expected to receive its impact and so do the national currencies of the emerging economies. As per the market experts, Yuan is the lead indicator of emerging markets and India isn’t an insulated part of this. So, if the Sino-US trade war is hitting Yuan, so does the Indian National Rupee (INR). This may end in USD to INR at an all-time high and can hit India’s economy.?

A currency war is a mutually internecine war among the nations where each nation is trying to enhance its export by plunging its currency further. It is believed that currency wars are damaging to all nations. India has not witnessed a currency war, even so when China deliberately weakened the Yuan, we came close to that in 2015. This led India to weaken the INR along with other EMs weakening their currencies to stay diligent in exports. Currency wars are not too common but that is a likelihood that many economists have been in conversations for quite sometime now. Till today, rupee value is measured in terms of US dollars. Hence, it consequently is exposed to external factors. Any fluctuations in Dollars, Yuvan, & Euro tends to impact INR too.?

Latest USD/INR Forecast in 2023 and Beyond

The price of the Indian rupee (INR) declined from its peak in 2022 as attention turned to a probable Fed turnaround this year. It declined as the US dollar index kept falling, reaching its lowest point in several months. On January 20, the US dollar (USD) to Indian rupee (INR) exchange rate fell to its lowest level since November 14 at 80.85. In terms of the dollar, the Indian Rupee began 2023 strongly as the DXY Index dropped to a 6-month low of 100.8. The Reserve Bank of India (RBI) increased its benchmark repo rate by a quarter percentage point in February. Although this move was anticipated, the markets were taken aback when the RBI said there was still room for further tightening because core inflation was still high.

As major central banks across the world continue to struggle with rising inflation, some experts anticipate the rise to be the final one in the RBI's current tightening cycle, which has seen it boost rates by 250 bps since May 2022. The repo rate for the nation has increased by 1.9% to 6.50% since May thanks to the RBI's rate-setting committee. According to TradingEconomics, as of 2 December 2022, the Indian rupee was expected to continue weakening. Its USD/INR forecast predicted that the pair could be at 82.40 by the end of the current quarter and continue weakening to 84.57 in a year’s time – by December 2023. In their USD/INR estimate for 2023, analysts at Dutch lender ING Group predicted that the USD/INR currency pair will increase to an average of 84 by Q1 2023 before progressively declining to trade at 82.00 by Q3 2023. Looking ahead, they predicted that the rupee will trade between 80 and 82 INR to the USD until 79.50 in 2024.?