Why the Indian Rupee fell 10% against US Dollar in 2022?

Why the Indian Rupee fell 10% against US Dollar in 2022?

News: The Indian rupee depreciated by around 10 per cent against the US dollar in 2022 on account of sharp appreciation of the greenback (a dollar), as the US Federal Reserve tightened its interest rate to check inflation amid the uncertainties surrounding the Russia-Ukraine conflict. 

How did Rupee perform in 2022?
• The rupee was the worst-performing Asian currency in 2022, witnessing a fall of around 10 per cent against the greenback. 
• This decline was mainly on account of appreciation in the US currency on safe haven appeal amid fears of recession and inflation across many parts of the world and Russia-Ukraine war. 
• During the year, Chinese Yuan, Philippine Peso and Indonesian Rupiah fell around 9 per cent. South Korean Won and Malaysian Ringgit declined by nearly 7 per cent and 6 per cent, respectively. 

What was the reason for capital outflows?
• The US Fed aggressively raised interest rates by 425 basis point (bps) in 2022 in its fight against inflation. This led to a higher interest rate differential between the US and India, and investors pulled out money from the domestic market and started investing in the US market to take advantage of higher rates. 
• In 2022, foreign portfolio investors (FPIs) pulled out Rs 1.34 lakh crore from the Indian markets – the highest-ever yearly net outflow. 
• Russian invasion of Ukraine accentuated the FPI withdrawals with the global economic slowdown making inflows tougher. 

What is the outlook on rupee for 2023?
• It is expected that the depreciation in local currency may not continue for a longer period as India remains the fastest-growing economy. 
• When the (US Fed) tightening is over, the tide will surely turn, RBI Governor Shaktikanata Das said during the December monetary policy announcement.