‘Narrowing CAD good for rupee but poll results a two-way risk’

A narrowing current account gap is likely to bode well for the rupee although outcome of the Lok Sabha elections remains a large two-way risk, experts say.

“Increasingly credible monetary policy under the new RBI governor, continued positive momentum in global manufacturing in the context of a high share of cyclical sectors in India’s equity market, and a fast-narrowing Indian current account deficit bode well for equity inflows and rupee,” Barclays said in its ‘India Outlook 2014’ report.

Over the next 6—12 months, Barclays forecasts that the rupee would be at 61/$, while the 2014 election outcome remains a large two-way risk.

The rupee, which hit a lifetime low of 68.85 (intra-day) versus dollar on August 28 last year, has stabilised since early-September, supported by a improvement in India’s current account balance and a slew of measures by RBI, including policies designed to mop up near-term capital flows, it said. On Friday, it closed at the year’s highest level of 61.90, logging a 10 per cent rebound from its life-time low.

A Nova Scotia report on the Asian forex market said the rupee would be seen stabilising but “risking lower” in our view as monetary policy outlook is clouded.

“The INR has proven to be reasonably robust to the Fed’s taper and has been trading in a fairly tight consolidation range. We shall favour the upside in INR given the inability of the RBI to easily navigate the economic dynamics currently at play,” said the Canadian bank.

As the macroeconomic indicators improve, the rupee is expected to appreciate further after a forgettable 2013.

“Improvement in GDP, Balance of Payment and possible moderation in CPI will benefit the INR. We feel the INR has seen the worst and can appreciate with revival in growth,” said Mirae Asset Global Investments (India).

Last year, the rupee faced pressure after the Fed chief Ben Bernanke hinted at curbing its $85 billion monthly bond purchase programme. This raised concerns that funds available for investing in emerging markets would be reduced.

Emerging market economies, including India, witnessed massive funds pull out, resulting in various currencies plunging to lows.

However, after Raghuram Rajan took over as RBI Governor on September 4, things have started looking up and rupee has started appreciating. The RBI introduced forex swaps to mop up forex, among other steps, to support the rupee.

The CAD, which is the difference between inflow and outflow of forex, touched an all-time high of $88.2 billion in 2012-13. However, the government is confident that the gap will narrow to around $50 billion this fiscal.

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