The domestic unit’smovements are closely linked with the changes in forexreserves
The domestic unit may strengthen marginally against the US dollar next year. According to a recent report titled ‘Ecoscope – India’s Quarterly Economic Outlook’ released by Motilal Oswal, the country has posted its first quarterly current account surplus in 13 years and expected to post a first annual surplus in 17 years in the financial year 2021-22. This is a result of a sharp contraction in domestic economic activity, a crash in commodity (oil and non-oil) prices, and very strong capital inflows. Going into calendar year 2021, as the country’s real gross domestic product (GDP) growth improves, its current account surplus would also disappear.
The current balance may move from a surplus of 1.3 per cent of GDP in FY21 to a deficit of 0.2 per cent of GDP next year. However, due to the Reserve Bank of India’s intervention and the general bias against a strong rupee, the currency actually weakened 3.1 per cent against the dollar in this year.
According to the report, the domestic unit’s movements are closely linked with the changes in forex reserves, rather than the current account balance. Accordingly, while a weaker rupee was surprising in the calendar year 2020, it is likely to strengthen 1.3 per cent and average 73.5 against the US dollar in the financial year 2022-23, as compared to an average level of 74.4 in the financial year 2021-22.
While the current account is expected to move back into marginal deficit in the financial year 2022-23, continued accretion to foreign exchange reserves may help the domestic unit to strengthen against the American currency. Moreover, while the US dollar could reverse its falling trend, no serious headwinds are foreseen for the rupee.
