The Indian rupee ended 2022 as one of the worst-performing Asian currencies, with a fall of 10.14 per cent — its biggest annual decline since 2013 — as the dollar rocketed on the US Federal Reserve's aggressive monetary policy stance to control inflation.
The rupee finished the year at 82.72 to the US currency, down from 74.33 at the end of 2021, while the dollar index was heading for its biggest yearly gain since 2015.
The only other Asian currency to fall more than the rupee was the Japanese yen, which was set to close 2022 down more than 12 per cent against the dollar.
The rupee was also a victim of a rally in oil prices sparked by the Russia-Ukraine conflict, which pushed India's current account deficit to a record high in the September quarter in absolute terms.
Heading into 2023, market participants believe the rupee would trade with an appreciation bias, finding relief from easing commodity prices and hopeful of foreign investors continuing to buy Indian equities.
“The Fed could keep rates higher for longer than anticipated and if the slowdown in developed economies turns into a prolonged recession, India's exports could be hit severely, which are two key risks for the rupee,” said Raj Deepak Singh, head of derivatives research at ICICI Securities.
Most traders and analysts expect the currency to move between a tight 81.50 to 83.50 range in the first quarter.
Equity inflows would be a key metric to watch for the rupee for foreign investors as well, analysts said.
But considering several uncertainties heading into 2023, such as tight monetary policy conditions, likely recession in some economies and a geopolitical conflict, gauging the direction of share markets had become tough, they said.
“There's going to be a period of softness in global equities … If we get a sell-off in Indian shares, I'll be less optimistic on the rupee,” said Christopher Wong, foreign exchange strategist at OCBC Bank.
Even if the rupee appreciates, it could still underperform Asian peers and would not be a top choice in the emerging market complex, Mr Wong said, expecting the South Korean won and the Thai baht to gain the most next year.