The steady flow of positive news seems to continue unabated. With both the US Federal Reserve and European Central Bank (ECB) announcing their respective stimulus packages, the tail risks to the Indian economy have abated. On the domestic side, too, the government’s actions have helped eliminate the chances of a sovereign downgrade. This has had an obvious impact on the rupee, which has appreciated by 3.53 per cent in September alone.
As the macro-economic environment deteriorated last year, the rupee depreciated 14.11 per cent in FY12 and in the current financial year, the currency has fallen another 5.28 per cent. This trend has reversed after a spate of announcements made both globally and locally. Economists are now expecting the rupee to stabilise at Rs 51-52 against the dollar by December of this year.
While the liquidity enhancing measures by ECB and US Fed are good for capital flows into the equity and bond markets, there is an equally tangible fear of commodity prices rising, which would further put pressure on the twin deficits. However, the threat of rising oil prices would be offset partially by a stronger rupee, explains currency derivatives expert Anindya Banerjee at Kotak Securities.
While the current account deficit could be a concern, Barclays believes it is not reason enough to keep the rupee weak. In a report, Bhuvanesh Singh of Barclays says: “Looking at the past 15 years, we found negligible correlation between INR:USD and the Indian current account deficit (CAD). While the current account deficit became a surplus during 1998-2003, the rupee depreciated by 30 per cent in the same time period. Similarly, when the surplus turned to deficit during 2003-08, the rupee appreciated 17 per cent. The currency could be more dependent on gross domestic product (GDP) growth, inflation or capital flows.”
There are plenty of triggers for capital flows to remain strong in India, believe experts. With the resolution of GAAR and reduction in withholding tax from 20 per cent to five per cent, along with other policy measures, portfolio flows are likely to remain strong. Shubhada Rao, economist at YES Bank, believes capital flows are likely to remain sufficient to bridge the estimated current account gap of 3.6 per cent of GDP in FY13. This should result in a flattish balance of payments scenario with a bias towards a mild surplus, an improvement from a deficit of $13 billion seen in FY12. Going by this, Rao expects the rupee to trade at Rs 52-54 levels by December.