Following the recent reforms announced by the government and expectations of calming risks globally, the market is expecting the Indian currency to strengthen from current levels against the dollar. HSBC on Monday revised the forecast of the rupee against the dollar to Rs 52 from its earlier forecast of Rs 57 by December. In fact, HSBC has also revised the forecast of the rupee to Rs 49 by September 2013 from its previous forecast of Rs 57.
“The time has now come to be more constructive on the currency, especially in light of the Fed’s latest QE (quantitative easing) and calming tail risks in the Euro zone. Additional reforms may be forthcoming, which in turn could quell concerns over a possible downgrade for the sovereign. If so, we would likely see additional room for the rupee to strengthen,” said Paul Mackel, Leif Eskesen, Perry Kojodjojo and Prithviraj Srinivas of HSBC Global Research in a report on Monday.
The rupee opened at Rs 53.75 per dollar on Monday and strengthened to Rs 53.66 on bullish equity markets. Market sentiments got a boost on expectations that the Reserve Bank of India (RBI) may cut key policy rates in the mid-quarter monetary policy review. However, hopes were dashed as RBI kept the repo rate and reverse repo rate unchanged due to which the rupee closed at Rs 54.01 against the greenback.
But overall bearish sentiments for the rupee has been diluted significantly due to the recent government measures, said J Moses Harding, head, asset liability committee and economy and research, IndusInd Bank.
“India's rating downgrade fear is also probably out of the way. The rupee against the dollar should settle down at Rs 52-53 by December. The trading range for this week is Rs 53-54.50.”
The HSBC report also points out that there are some suggestion that foreign institutional investors (FII) limits to invest in the corporate and government bond markets could be increased from the current $65 billion total. Besides, RBI recently eased the external commercial borrowing guidelines. According to HSBC Global Research, the relaxation of these guidelines for Indian companies should allow more funds to be raised overseas, thereby lowering the cost of borrowing. In addition, RBI will also allow companies to raise more funds through external commercial borrowings to repay rupee loans or for new capital expenditure in rupees. In the long run, this could help raise the economy’s growth potential and lead to a better balance of payments backdrop for the rupee, said the report.
Few market players are of the view that we may see the rupee touching Rs 52 against the dollar even before December. “We may see Rs 52 per dollar even in October. This may be possible on the back of improved market sentiments. India's change of stance in the policy making will help attract (FII) flows. But to sustain at those levels, we will have to keep control over our current account deficits,” said Pramit Brahmbhatt, chief executive officer, Alpari Financial Services.