The rupee is already reacting to the external tensions and, we believe, will depreciate further and settle around 77.5/$ by March 2023, said CRISIL in a note on Thursday.
"Two factors will play a pivotal role in driving the weakness: higher energy prices widening the current account deficit, and rate hikes by the US Fed resulting in some capital outflow," CRISIL said. But with Reserve Bank of India expected to continue intervening in the forex markets to manage volatility, a sharp depreciation in the rupee may be avoided though it could face volatility near term so long as geopolitical tensions persist, the report added.
Overnight, the U.S. Federal Reserve raised its benchmark rate by 25 basis points as expected. Future projections showed that the median projection of the Fed Funds rate stands at 1.9% at the end of 2022 and at 2.8% at the end of 2023.
"A gauge of the dollar’s strength fell after Federal Reserve Chair Jerome Powell struck a more positive tone on the prospects for economic growth amid policy tightening," said HDFC Securities in a research note. "Safe haven currencies and commodities declined after China’s more market-friendly policy stance unveiled a day ago, and possible progress on cease-fire talks between Russia and Ukraine, are aiding risk sentiment," the note added.
The Indian rupee closed 0.45% higher at 76.27 against the U.S. dollar on Wednesday.
The domestic currency appreciated in line with the Indian markets that logged the best day in a week. The U.S. Federal Reserve hiked rates by 25 basis points and signaled hikes at all six remaining meetings this year, to tackle inflation.
Crude prices rose after three days but remained at $100-a-barrel level.
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