Why A Weak Rupee Looked Strong In CY23

Rupee saw the least percentage fall on buoyant FPI flows and benign crude, but an encore will depend on Fed rate cuts and oil staying lower.

-  V. KESHAVDEV

There are enough and more memes around the weakening of Indian rupee trending on social media in recent times, but the one with the wittiest lines goes like this: A Hindi movie actress is seen saying, "Mujhe nahi pata tha ki thode se rupaiyoo ke khatir tum itna neeche gir jaoge!" (I did not know that for a few rupees you will stoop to such a low) to which yesteryear Hindi movie villain Ranjeet remarks, "Jab rupaiya itna neeche gir sakta hai, toh mai kyu nahi?" (If the rupee can fall to such a low, why can't I?).

Hilarious as it reads, the reality is that the rupee has ceded ground against the greenback ever since the Reserve Bank of India (RBI)-induced devaluation in 1991. The currency kept heading south in the ensuing 33 years, though intermittently - 2002 to 2004, 2006 and 2007, 2009 and 2010, and 2017 - it managed to change course. Yet, over the past three decades, the currency has fallen 78.23% from 18.10 to end 2023 at 83.17. Though YTD (February 3, 2024), the currency has gained 0.31% to 82.91.

But, interestingly, for the first time, the rupee has shown the least percentage depreciation of 0.46% in a calendar year, a resounding performance considering the Indian currency came off by 10% in 2022. The primary reason for the turnaround was the weakening of the dollar, particularly in the latter part of 2023 with the U.S. Fed indicating that the rate hike cycle had peaked. "There is a general belief that beginning March 24, the Fed would start cutting rates," says Aditi Gupta, economist, Bank of Baroda.

The weakening of the dollar index was also complemented by robust foreign portfolio inflows of $29 billion last year, with December seeing a record monthly inflow of nearly $10 billion.