Overview:
With India's external vulnerability on the rise, global risk appetite and liquidity matter more than ever for stability of the rupee. Of late, even smaller external shocks are causing massive volatility in the currency.
We expect the rupee to appreciate from the current lows to about 56/USD by March-end 2014 as capital inflows resume and current account deficit (CAD) softens in 2013-14.
The key external monitorable for direction of the currency is the stance of developed countries, particularly the US, on withdrawal of quantitative easing (QE). On the domestic front, pushing through key policy reforms that will revive the economy, bolster investor sentiments and attract foreign inflows will be the key monitorable.
CRISIL Research expects the rupee to strengthen from current levels and settle at around 56 per dollar by end-March 2014. The appreciation will mainly be driven by resumption of FII inflows, which in turn, will be led by two factors. Firstly, we believe, the current capital flight from India is a short term phenomenon and is largely in response to the uncertainty surrounding the impact of the Federal Reserve's pullback of QE. Secondly, the government is pledging a slew of domestic policy reforms to shore up domestic and foreign investor sentiments. This will act as a pull factor for foreign capital inflows. And finally, we expect current account deficit as a per cent of GDP to be lower in 2013-14 vis-à-vis last year. We therefore, expect trade deficit to narrow going ahead and lower pressure on the rupee.
Disclaimer: CRISIL Research, a division of CRISIL Limited (CRISIL), has taken due care and caution in preparing this Report based on the information obtained by CRISIL from sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. This Report is not a recommendation to invest / disinvest in any company covered in the Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL's Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), which may, in their regular operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of CRISIL's Ratings Division / CRIS. No part of this Report may be published / reproduced in any form without CRISIL's prior written approval.
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