Global brokerage firm Goldman Sachs has predicted that rupee will gradually depreciate to Rs 65 versus dollar by November next year from the present 62 to a dollar.
In a report dated November 28, Goldman said while higher inflation compared to trading partners may keep the Indian currency on a structurally depreciating path, an improving balance of payments may limit the extent of depreciation in the near term.
The inflation differentials with partners may continue to put pressure for nominal depreciation, Goldman said, adding that there are two additional sources of depreciation pressure – the Fed taper and putting oil companies' demand for forex back in the market.
Against these are an improving balance of payments picture, significant carry costs and RBI's aversion to a sharp depreciation. Any downside surprise to commodity prices can also help. Further, the tail risk has certainly diminished for the rupee as the RBI has been able to recuperate some reserves through its forex swaps and by entering into swap arrangements with other central banks, it said.
On slowing economic reforms, Goldman said while structural reforms looked promising at the start of 2013, the implementation remained patchy through the course of the year.
It said the Cabinet Committee on Investment managed to completely clear only a few projects, as they were stuck in various ministries and at the state-level.
Besides, it said the forward movement on the goods and services tax (GST), or on the unique identity program was slower than expected. The land bill that was passed added additional layers of clearances, which may not expedite the acquisition of land to a pace expected. India Inc has also complained that the new bill will not help companies to acquire land and in fact delay projects further and make them expensive.
Goldman said the pace of reforms in the power sector was especially slow compared to expectations.
"While Coal India signed fuel supply arrangements with power producers, there were still problems with the availability of coal and appropriate policies to pass-through higher input prices to consumers," it said.
However, there was some movement on awarding contracts for the freight corridor, financial restructuring of power distribution companies made some progress, the Pension Reform Bill was passed by the Parliament, and diesel prices continued to be raised to reduce the quantum of fuel subsidy.
Short-term measures taken by the new RBI Governor Raghuram Rajan as well as the government in response to the rapid rupee depreciation were more impactful. These included measures to restrict gold imports to reduce the current account deficit, encourage greater forex inflows, through FX swap arrangements, financial market reforms to incentivise financial savings, and to open the banking sector to greater competition.