The Indian rupee's decline in 2023 was the smallest in a six-year losing streak, while volatility hit decadal lows due to the central bank's persistent intervention, which will likely remain a key factor governing the local unit's fortunes over 2024.
The rupee shed 0.5% of its value in 2023, which was its smallest annual percentage change in at least 20 years.
It was also far smaller than the 10% plunge it recorded in 2022 when it was among the worst-performing Asian currencies in contrast to it being in the middle of the pack this year.
The currency ended the year at 83.2075 to the U.S. dollar, having swung between a high of 80.88 on Jan. 23 and a lifetime low of 83.42 on Nov. 10.
The Reserve Bank of India (RBI) used periods of rupee strength to build its forex reserves kitty and sold dollars when the local unit was under depreciation pressure or near record lows.
"We have seen regular action coming in (from the RBI) to protect movements on both sides," said Anshul Chandak, head of treasury at RBL Bank.
The RBI's "highly managed approach" may continue over 2024, Chandak added.
Persistent intervention pushed down the rupee's realised volatility in 2023 to its lowest among Asian currencies, other than the pegged Hong Kong dollar. Its implied volatility across tenors fell to multi-year lows.
Asian currencies weakened mostly tracking the faltering Chinese economy and higher-for-longer interest rate outlook globally but rising bets that the U.S. Federal Reserve will start cutting rates in early 2024 provided some relief.
U.S. Treasury yields and the dollar index have both retreated, with the two-year Treasury yield, a measure of Fed rate expectations, down nearly 100 bps from October highs. The dollar index has dropped to 101, from 107.34 in October.
The rupee outperformed currencies like the offshore Chinese yuan and the Korean won this year.
Foreign fund investments into India's equity and debt markets too picked up in the latter part of the year with inflows of $10.1 billion in December.
For the year, overseas investors bought $20.7 billion worth of shares and bonds worth $8.2 billion on a net basis.
Flows are expected to continue in 2024 following India's inclusion in JPMorgan's widely tracked emerging market debt index.
"A number of factors will be key for the rupee, but for me, RBI FX policy will be the most important," a treasury official at a private sector bank said.
