The rupee depreciated by 169 paise — or 2.37 per cent — against the US dollar in 2020, marking a third straight year of decline for the domestic currency. Finishing the year at the highest level recorded in nearly four months, the rupee settled at 73.07 against the greenback on December 31, 2020. The year 2020 saw the rupee logging an all-time low of 76.91 against the American currency as the coronavirus pandemic stalled the global economy.
Weakness in the US dollar in the final quarter of 2020 along with robust foreign exchange reserves helped the rupee recover about half of the year's losses, shutting shop at 73.07 compared with 71.38 at the end of 2019.
"The rush towards the safety of dollar, significant outflows and decline in domestic equities to multi-year lows further dented the sentiments. However, major central banks and governments across the globe came to the rescue and slashed interest rates to record lows, and rolled out massive stimulus packages. This changed the entire landscape for the greenback and the global as well as domestic equities," Sugandha Sachdeva, VP-metals, energy and currency research at Religare Broking, told NDTV.
The government's fiscal deficit surged to Rs 10.75 lakh crore, or 135.1 per cent of Budget Estimates, at the end of November 2020, mainly on account of low realisation of revenue due to disruption in business activities amid the Covid-19 pandemic. The fiscal deficit at the end of November 2019 had stood at 114.8 per cent of 2019-20 estimates.
The lockdown imposed to curb the spread of coronavirus had significantly impacted business activities and, in turn, contributed to sluggish revenue realisation.
"As we wrap up for a bumpy 2020 where the rupee remained one of the worst-performing regional currencies, 2021 brings no surprises. The unprecedented fiscal and monetary support in the form of stimulus and lower interest rates turned a boon for 2020 to help economy come back on recovery road," said Amit Pabari, managing director at forex advisory firm CR Forex Advisors.
The Road Ahead
Analysts say persistent gains in domestic equity markets as foreign fund inflows return after a halt due to holidays may support the rupee in the near term.
"Going forward, continued portfolio inflows, weakness in the dollar index, accommodative monetary policy stance of the Federal Reserve and reviving domestic economy is expected to favor strength in rupee for the short term," added Ms Sachdeva, who expects the rupee to test 76.00-76.50 levels against the dollar in 2021. Nonetheless, the economy is still facing a lot of challenges and getting back to previous growth from the pandemic's deep abyss seems tough, she said.
India's gross domestic product (GDP) contracted 7.5 per cent in the July-September period, in a sign of rebound from a record slump of 23.9 per cent in the previous quarter.
"Even domestic equities look quite stretched, where there can be some consolidation which can eventually lead to a downwards drift in the rupee from a long term perspective. Additionally, risks of rise in crude oil prices and concerns about vaccination drive for the masses could be negative for the rupee-dollar equation."
In 2020, domestic stock benchmarks recorded the best annual return in the past three years, with the the S&P BSE Sensex index gaining 6,497.59 points, breaking a series of records. Some analysts say a significant correction in the current liquidity-driven rally in the equities cannot be ruled out.
"To put it in a nutshell, the strength in the rupee seems to be limited to 72.00-72.50 whereas the weakness will be capped near 75.00-75.50 levels, keeping the broader range for rupee in 2021 bounded between 72.00 and 75.50 for 2021," Mr Pabari added.