China Economy - Period Of Surging USD Over, But India To Persist With Mildly Weaker NEER: ICICI Securities

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ICICI Securities Report

Having appreciated by 19.1% YoY at end-October 2022 in trade-weighted terms, the U.S. dollar has shed some of that strength this month – marking a decisive shift, in our view, as the Eurozone in particular is obliged to raise interest rates much more aggressively than the U.S. Fed over the next half-year.

A stable or mildly-weaker U.S. dollar buoys emerging economies, but India is likely to take the opportunity to regain some competitiveness relative to the Europe, Japan and Korea (whose currencies have depreciated sharply against Rs in March-October 2022).

Accordingly, India’s foreign exchange reserves grew by $20.2 billion in the three weeks ending Nov, 11 2022 to $544.7 billion (albeit still $88.9 billion lower than at end-CY21).

We expect the Reserve Bank of India to prefer rebuilding foreign exchange reserves over the next half year, keeping Indian rupee in the 81.5-82.5/U.S. dollar range, thereby also weakening against euro, Japanese yen,  Korean won and British pound sterling (as they regain some of the ground they’d lost to the U.S. dollar in the year-to-date).

This will ensure that India’s nominal effective exchange rate depreciates 1-2% YoY over the next half-year, even as the Indian rupee/U.S. dollar rate stays broadly stable.

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