Barclays pegs Re at 59 on poll-push, lower CAD & inflation

Easing inflation, CAD and strong FII inflows support bullish outllook for rupee

The rupee is likely to rally to 59 in the short-term on narrowing current account deficit, higher inflows from foreign investors and easing inflation, Barclays said in a report.

The report also said there could be a pre-poll rally in all asset classes in the country as investors expect a pro-market BJP government to form the next government.

The rupee ended at a seven-month high of 60.85 yesterday. Today, it opened at 60.65 on higher capital inflows.

"We think recent positive rupee momentum, on the back of a narrowing current account deficit, softer inflation prints, enhanced policy credibility and strong capital inflows, will continue in the near-term," Barclays said.

The rupee and equities were rallying since last week after the Election Commission announced the timeline for the general elections.

The local currency also appreciated after the current account deficit narrowed sharply in Q3 to $4.2 billion or 0.9% of GDP.

Quoting a recent Financial Times report, Barclays said: "With opinion polls favouring the BJP-led NDA coalition, which is perceived as market friendly, there could be further pre-election rallies in Indian assets."

Barclay's has revised its one-month dollar/rupee forecast to 59 from 61.

It has also lowered the target on short dollar/rupee trade recommendation to 59 from 60.5 and stop-loss at entry level of 62.5 from 64.

"For FY13-14, we lower our current account deficit forecast to $38 billion, or 2.1% of GDP," it said.

Barclays' believe the current account deficit will continue to adjust and remain within a 'safe' limit at 2.5% in FY14-15 at $50 billion.

It further said the international investors have been encouraged by lower rates of inflation, contributing to higher real interest rates and providing a more constructive backdrop for businesses and their investment decisions.

However, it believes the upcoming elections remain a risk for the rupee and so has kept 3, 6 and 12-month dollar/rupee forecasts unchanged at 61.