Rupee Forecast: The rupee has weakened by 1.8% relative to the U.S. dollar in December 2021 so far, making it the second worst performing emerging market currency after the Turkish Lira.
This follows from the increase in risk aversion ignited by the Omicron variant of the Coronavirus, the widening domestic trade deficit, accelerating domestic and global inflation, and market expectations of the U.S. Federal Reserve Bank shifting into inflation-fighting mode.
Accelerated Taper Announced
Following the accelerated taper announced by the U.S. Fed, along with the signal of three rate hikes in 2022, the dollar index is likely to strengthen further, especially if the Omicron variant leads to a rise in risk aversion.
Rupee Temporary Depreciation
In our view, the rupee may witness further temporary depreciation in the rest of this month, amid lower trading volumes during the year-end holidays. However, large forex reserves and an overall modest current account deficit of 1.4% of gross domestic product in FY22 would prevent an untoward depreciation.
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