Standard Chartered Plc., which was among the most bearish forecasters for the Indian rupee over the past couple of years, is turning more upbeat on the currency amid an improvement in the nation’s trade deficit and a softer dollar.

The British lender now sees the base case for the rupee at 81 per dollar by end-2023 but says the currency can easily gain to even 79 levels, Parul Mittal Sinha, head of financial markets for India, said in an interview. That would be the highest since August and imply a gain of more than 3 per cent from current levels.

“The balance of payments behavior has started improving with the January trade deficit showing a healthy decline from previous months,” Sinha said, adding she expects the dollar to weaken in the medium-term as focus shifts to US growth slowdown worries and Federal Reserve rate cuts even as the greenback remains sensitive to US rate-hike repricing and risk aversion in the near-term.

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The rupee has gone from being emerging Asia’s worst-performing currency last year to rank the third best so far in 2023 after the Indonesian rupiah and the Philippine peso. The nation’s trade deficit contracted sharply in January, fueling expectations that the current account gap will widen less than earlier estimates.

“If we continue to see positive news on services export growth, commodity prices correcting and dollar index not ratcheting higher, rupee seems to be in a very good place,” StanChart’s Mittal said.

Mittal’s latest forecast comes after she rightly predicted a fall in the Indian rupee in 2021 and the currency’s drop to 82 per dollar last year. StanChart isn’t alone in turning bullish on the rupee, BofA Securities Inc and Citigroup Inc. have also recently forecast further gains for the currency.

RBI Risk

However, risk to the bullish rupee view stems from the possibility of the Reserve Bank of India buying dollars around 81 levels to rebuild its reserves which were used in defending the currency last year, according to Mittal. 

India’s forex reserves fell for most of 2022 as the central bank intervened to shield the rupee, which weakened past 83 to a dollar in October. Reserves in Asia’s third largest economy started increasing again later in 2022 as major currencies strengthened against the dollar. The stockpile of foreign currencies stood at a five-month high in January.

“If the RBI steps off from buying, the dollar/rupee can fall very sharply,” Sinha said. The only reason why the rupee is appreciating gradually is because the RBI is rebuilding its reserves, she said.