The two factors that will lead to this are a lower current account deficit and a pick-up in foreign capital inflows
In a sharp departure from current speculation, rating agency CRISIL, on Friday, said that it expects the rupee to recover from its current level and end at 60 against the dollar by March 2014.
The two factors that will lead to this result, according to a report put out by the agency, are a lower current account deficit (CAD) and a pick-up in foreign capital inflows in the second-half of the current financial year.
The forecast of 60 per dollar, however, is still a significant downward revision from the agency’s earlier forecast of 56 a dollar.
“CAD is expected to correct significantly in the second-half of the year due to a decline in non-oil imports including gold. Secondly, foreign capital inflows are expected to pick up when the steps announced by the government to attract $11 billion begin to materialise,” CRISIL said.
“Despite a lower CAD, total foreign capital inflows in 2013-14 will be insufficient to cover it. As a result, the rupee will, on an average, be 12 – 14 per cent weaker in 2013-14 compared to the previous year,” the agency added. However, as majority of these inflows are expected in the second-half, the rupee will strengthen by next March-end.
However, CRISIL points out, risks to the rupee forecast arise from “uncertainty among foreign investors around the impact of the U.S Federal Reserve’s likely pull-back of quantitative easing. “If the roll-back of QE3 progresses at a fast pace, then the global liquidity situation will tighten, which will have an adverse impact on emerging market currencies, including the rupee,” the agency said.
CRISIL’s revised forecast of CAD at 3.9 per cent of GDP in 2013-14 is mainly due to the expectation of a nearly 28-30 per cent fall in gold imports.