The rupee closed at Rs. 59.68/69 a dollar as compared to its previous close of Rs. 59.27/28. It fell to an intra-day low of Rs. 59.82.
“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,” said Crisil Research. However Crisil said that the rupee would appreciate from the current lows to about 56 a dollar by March-end 2014 as capital inflows would resume and current account deficit (CAD) would soften in 2013-14.
The key external monitorable for the direction of the currency is the stance of developed countries, particularly the U.S., 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.
The appreciation will mainly be driven by resumption of FII inflows, which in turn, will be led by two factors, according to Crisil. First, 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.
Second, 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, said Crisil, “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”.
