The rupee was among the worst performing currencies this year, hitting a record low of 68.85 against the dollar due to the weak domestic economy and speculation over scaling back of stimulus, or extra printing of notes, by the US.
The rupee lost 27% of its value between June and August largely due to a pull-out of money by foreign institutional investors (FIIs) after the US Federal Reserve said it will consider reducing its $85 billion monthly bond-buying programme, introduced after the 2008 global economic crisis to pump prime the economy.
The rupee hit a record low of 68.85 against a dollar Aug 28, just over three months after the US Federal Reserve's May 17 announcement of possible scaling down on the stimulus programme.
"Rupee witnessed an extremely volatile year. US tapering speculation had a big impact; at the same time there are a lot of domestic macro-economic issues," said Anis Chakravarty, senior director at Deloitte India.
Chakravarty said that structural problems of the Indian economy like slow growth, high inflation and widening current account and fiscal deficits made the rupee vulnerable.
FIIs also pulled out $3.7 billion from the Indian equities markets between June and August leading to over 10% slide in the benchmark sensitive index (Sensex) of the Bombay Stock Exchange (BSE).
Global funds have sold this year $8.9 billion worth of bonds amid US stimulus tapering speculation. Total foreign holding of rupee-denominated bonds stand at around $25 billion, or 29 % of the $81 billion ceiling set by the government.
The rupee as well as the stock markets recovered after the Reserve Bank of India (RBI) took a number of steps to help the battered currency and improve investors' sentiments.
Sentiments were further boosted after the the US Federal Reserve announced in mid-September that it would keep intact its $85 billion monthly bond-buying programme, known as Quantitative Easing (QE).
Most analysts expect that the US will start tapering the stimulus further from early 2014 that would again put pressure on the Indian currency. However, now the reaction would not be knee-jerk as it was seen after the May announcement, analysts added.
"While global factors point towards appreciation in the rupee for the next six months, we feel that sharp gains in the rupee could be restricted on the back of dollar buying by oil importers," said Reena Rohit, chief manager non-agri commodities and currencies at Angel Broking.
"Since we expect crude oil prices to increase in the coming months, the rising cost of imports coupled with dollar buying can be a big factor capping sharp appreciation in the rupee," Rohit said.
Improvement in current account deficit numbers along with mobilisation of nearly $34 billion by the RBI through various measures helped the rupee regain some ground.
The partially convertible rupee was trading in the range of 61-62 level towards the end of the year, showing a gain of nearly 10% since August's record low.
There was huge buying of Indian equities by global funds between October and December. Overseas funds have bought $17.5 billion more of Indian stocks than they sold this year through 28 November.
India's current account deficit fell to $5.2 billion in July-September quarter, 75% down from $21 billion recorded in the corresponding quarter of last year.
As proportion of the country's gross domestic product (GDP), the current account deficit during the quarter ended September 2013 was 1.2%, sharply down from 5% recorded in the corresponding quarter in the previous year, according to the latest RBI data.
President of industry body Assocham Rana Kapoor said the biggest positive impact of the improvement in the current account deficit numbers would be on rupee.
"The government should now focus on meeting disinvestment target for the current fiscal as that will address concerns on the public finance," said Kapoor, who is also managing director of private sector lender Yes Bank.
"While near-term currency movements may be driven by trader sentiment, and the RBI may also try to dampen over-strengthening, we envisage a few months in the year when the market may adjust to currency appreciation," Credit Suisse said in a research note.
Highlights of 2013:
- Rupee hit record low of 68.85 against a dollar Aug 28
- Indian currency lost 27 % of its value between June and August
- Speculation of US stimulus tapering led huge pullout of money by the FIIs
- Weak macro-economic numbers like slow growth, high inflation and deficits put pressure on rupee
- Rupee gained over 10 % between September and December on the back of RBI measures and positive cues from US Fed