The dollar, on the other hand, saw significant gains due to the US Federal Reserve's efforts to curb inflation through aggressive monetary policy. At the end of the year, the rupee stood at 82.72 per US dollar, down from 74.33 at the end of 2021. The dollar index was on track to see its biggest yearly increase since 2015. The Japanese yen was the only Asian currency to fall more than the rupee in 2022, closing the year down by over 12% against the dollar.
In addition to the strong US dollar, the rupee was also impacted by rising oil prices resulting from the Russia-Ukraine conflict. This led to India's current account deficit reaching a record high in the September quarter.
Indian Rupee Outlook for 2023
Looking ahead to 2023, market participants believe the rupee will have an appreciation bias. This is due to easing commodity prices and the possibility of foreign investors continuing to invest in Indian equities. However, there are a few risks to consider. The US Federal Reserve may keep interest rates higher for longer than expected, and if there is a prolonged recession in developed economies, it could negatively impact India's exports.
Analysts predict the rupee will trade in a narrow range of 81.50-83.50 in the first quarter of 2023. Foreign investors will want to keep an eye on equity inflows as a key metric for the rupee. However, with several uncertainties on the horizon, such as tight monetary policy conditions, the potential for a recession in some economies, and ongoing geopolitical conflict, it may be difficult to predict the direction of share markets.
Christopher Wong, the FX strategist at OCBC Bank, commented, "There's going to be a period of softness in global equities... If we get a selloff in Indian shares, I'll be less optimistic on the rupee." Even if the rupee does appreciate, it may still underperform compared to other Asian currencies. Wong expects the South Korean won and Thai baht to see the most gains in 2023.