The rupee is likely to get a boost from the government's PSU bank recapitalisation programme which is expected to support private capex recovery and increase foreign investor interest in domestic equity markets, says a report.
According to the global financial services major, "stronger growth and INR correlations with equities are supportive of further currency gains".
Besides reviving credit growth after a period of weakness post demonetisation, the recap plan will help banks wind down their Non Performing Assets (NPAs) or bad loans and take up fresh credit, which should help boost a private capex recovery in India, the report noted.
According to Morgan Stanley economists, the announcement is not expected to impact fiscal deficit position of the country and inflation number, but is likely to have a positive impact on the economic growth parameter.
They see upside to their growth projections of 7.5 per cent for 2018-19, while not seeing a risk to macro-stability in terms of the fiscal deficit and inflation from this announcement.
"INR (rupee) should receive support from India's push to growth via a $ 32.5 billion recapitalisation of its public sector banks," the report said, adding that stronger growth and INR correlations with equities are supportive of further currency gains.
The rupee is currently hovering around Rs 65 level against the US dollar.
"We think that INR remains a high-quality emerging market story showing low sensitivity to rising US yields," the Morgan Stanley report said.
Moreover, the foreign investor interest in the domestic equity market is likely to increase.
"Foreign investor interest in Indian equities should recover, where FPI's have been sellers of $4.3 billion in equities over the past two months," the report said.