Rupee records smallest annual decline in six years amid RBI intervention

The Rupee experienced its smallest annual decline in a six-year losing streak in 2023, coupled with a notable drop in volatility, as the central bank's consistent intervention played a pivotal role in shaping the currency's trajectory. The Reserve Bank of India (RBI) maintained a highly managed approach, leveraging periods of Rupee strength to bolster its forex reserves and intervening in the market during episodes of depreciation pressure or nearing record lows.

In 2023, the Rupee depreciated by a modest 0.5 per cent, marking its smallest annual percentage change in at least two decades. This was a significant contrast to the 10 per cent plunge observed in 2022 when the currency ranked among the worst-performing in Asia.

Closing the year at 83.2075 against the US Dollar, the Rupee's journey included fluctuations between a high of 80.88 on January 23 and a lifetime low of 83.42 on November 10.

Anshul Chandak, Head of Treasury at RBL Bank, noted the RBI's proactive measures, stating, "We have seen regular action coming in (from the RBI) to protect movements on both sides." He anticipates the RBI's "highly managed approach" to persist into 2024.

The central bank's consistent intervention played a role in driving down the Rupee's realised volatility in 2023, making it the lowest among Asian currencies, excluding the pegged Hong Kong Dollar. Implied volatility across tenors also reached multi-year lows.

While Asian currencies weakened due to factors like the slowing Chinese economy and a global outlook of higher interest rates, hopes that the US Federal Reserve would initiate rate cuts in early 2024 provided some relief. Declines in US Treasury yields and the Dollar index contributed to this sentiment.

In comparison to offshore Chinese yuan and the Korean won, the Rupee outperformed in 2023. Foreign fund investments in India's equity and debt markets gained momentum, with December witnessing inflows of $10.1 billion. Throughout the year, overseas investors bought $20.7 billion worth of shares and $8.2 billion in bonds on a net basis.

As India enters JPMorgan's widely tracked emerging market debt index, analysts anticipate continued flows in 2024. A treasury official at a private sector bank highlighted the significance of the RBI's FX policy as a key factor influencing the Rupee's performance in the upcoming year.

(With Reuters inputs.)