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Notwithstanding the likelihood of US Fed reversing the quantitative easing programme, India Ratings expects the rupee to appreciate to 59-61 per US dollar by end-FY14.
“The expectation is based on recent policy measures taken by the Reserve Bank of India, resumption of capital inflows, passage of economic reform bills, lower current account deficit in FY14 and pick-up of economic growth momentum from Q3FY14,” the ratings agency said in a report.
“The fall in the rupee since May 2013 like other emerging market currencies was triggered by the expectation of a roll back by US Fed on its monthly $85 billion bond purchase programme. However, the rupee depreciated more than other emerging market currencies due to India’s high current and fiscal account deficit as also the speculative attack on the currency in August 2013,” said Devendra Kumar Pant, Chief Economist and Head - Public Finance, India Ratings.
The report said that India has been running a very high current account deficit since FY12. Consequently, there has been a depreciation bias in the rupee-dollar exchange rate. Moreover, CAD has largely been financed by debt-creating foreign institutional investment, but are highly volatile and can flow out of the country in a short time, putting pressure on the local currency. This is exactly what happened in each of the three episodes over FY12-FY14 when INR depreciated sharply.”
“In addition to high CAD, another fundamental reason for the rupee-dollar fall has been inflation rate differentials between India and the US. These are reflected as changes in the nominal exchange rate between the two currencies," says Sunil Kumar Sinha, Director - Public Finance, India Ratings.
The rupee slipped to its lowest at 68.80 against the dollar on August 28.
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