IPO bound foreign inflows as well as buoyant stock markets are likely to strengthen the Indian rupee in 2022.
Besides, strong forex reserves coupled with rising exports is expected to support the trend.
However, likely stiffening of monetary policy rates along with faster US taper and a rise in crude oil prices will trigger volatility.
In 2021, the rupee oscillated between 72.21 and 76.31 to an US dollar.
On the upside, the currency broadly reacted to India's largest IPO flow in one year as well as rising software exports.
In contrast, it was heavily dented by the biggest continuos FPI outflows of approximately $12 billion.
As per the data, on a net basis year-to-date, November 2021 saw overall inflows, including IPO bound funds, at $6.23 billion, the second worst performance in the last five years.
"We expect large IPO inflows to continue and equity performance to moderate in 2022. Rupee should trade between 74 to 78 levels," said Sajal Gupta, Head, Forex and Rates at Edelweiss Securities.
"Key factors shall be inflation and a bit tighter monetory policy. Trade deficit shall be clocking around $20 billion per month," Gupta added.
On the other hand, Gupta said the trend shall get offset by robust software exports and capital inflows.
"Inclusion in global bond indices shall help rupee to maintain stability. Strong reserves will keep volatility lower in 2022. The key risks for rupee shall be faster US taper and rising global intrest rates causing flight of global capital," Gupta said.
Lately, the growing cautiousness over US Fed's tapering measures as well as scare around Omicron impacted investor sentiments.
Notably, tighter liquidity controls in the US tempts global investors to pull out money from the emerging markets, such as India.
"We believe that in the first half of 2022, rupee could be volatile following a series of important events like the Union Budget, state elections, decision on bond inclusion in the global bond index, among others," said Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities.
"In the second half as the dust settles, we could see stability in forex markets. The rupee is expected to oscillate in the range of 77.50 to 74.50 for the full year and is likely to average around 76 for the full year," Vakil added.
Nevertheless, forex reserve with the RBI is expected to swell from $635 billion to $700 billion in 2022. The reserve will anchor rupee against any sharp moves.
The RBI is known to enter the markets via intermediaries to either sell or buy US dollars to keep the rupee in a stable orbit.
"Due to India's substantial foreign exchange reserves and greater foreign direct investment inflows, among other factors, rupee was among the most stable currencies in Asia-Pacific in 2021," said Kshitij Purohit, Lead for Commodities and Currencies at CapitalVia Global Research.
"The Indian rupee may trade at a maximum of 77.75 and a minimum of 77.50 against the US dollar," Purohit added.
But the new Covid variant combined with crude oil prices still remain crucial areas of concern for the USD-INR spot.
In 2021, the rupee had come under pressure as crude oil and energy prices soared.
Going ahead in 2022, energy prices are seen to be under some pressure as the market anticipates Brent to be under $80 a barrel and test the levels of $70-$68 for the first half at least.
"As the rise in the new variant of Covid-19 Omicron has pushed lockdowns again in many parts. India has also on precaution used semi lockdown or Night curfews recently, hinting at the possibility of rise in cases in early 2022," said Jateen Trivedi, Senior Research Analyst for Commodity and Currency at LKP Securities.
"This shall keep the rupee volatile as the rupee will find support from lower Crude prices, but will also face pressure in case of a major rise in cases resulting in lockdown," Trivedi added.
According to Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services: "In the coming year, investors will be backing up on better domestic fundamentals that would support the rupee, but at the same time policy normalisation could extend gains for the dollar.
"The recent move in the dollar suggest that the range has shifted higher and further lows in case of the rupee could be bought in and all the above factors mentioned will be important to determine trend for the rupee. We expect the USDINR pair to trade with a positive bias and with the range of 73.50 and 77.50."