BS poll: Rupee may strengthen in a month on improving CAD

Government and Reserve Bank to take steps to arrest the fall of the currency

The Indian rupee, which dropped to its lowest against the US dollar on Thursday, will strengthen within a month’s time, given the improving current account deficit (CAD) and possible future measures taken by the government and the central bank to boost the currency against the dollar.

According to market players, as the CAD is seen improving in the fourth quarter due to reduction in gold imports, the rupee will strengthen. Besides, experts believe the government and the central bank may take measures to boost the currency against the dollar.

The median of forecasts from 10 currency experts done by Business Standard shows the rupee is expected to trade at Rs 58.75 after a month.

The rupee weakened to an all time low against the dollar in intra-day trades on Thursday on the back of Federal Open Market Committee (FOMC) chairman Ben Bernanke’s confirmation which the street fears that the US Fed would begin to reduce its stimulus later this year as the economy improved. It touched a low of Rs 59.98 per dollar, breaching the previous intra-day all-time low of Rs 58.98 hit earlier this month. It had opened at Rs 59.62 a dollar and during the day, it touched a high of Rs 59.51.

The rupee ended at Rs 59.58 compared with a previous close of Rs 58.72.

The Reserve Bank of India (RBI) intervened to arrest sharp volatility, but in a scenario when forex reserves have been depleting, the impact was not much. “The size of the market has gone up sharply and the RBI’s reserves have not kept pace with the size of market. Due to which, the impact of their intervention is limited and the central bank understands this very well. So, the intervention of the RBI need not be strong,” said Partha Bhattacharya, deputy head, Mecklai Financial.

According to RBI data, forex reserves as on June 7, stood at $290 billion and as compared with end-March, it fell $2.4 billion. “RBI should intervene in the market to arrest volatility, but at the same time, they should keep in mind the strength of the reserves. Gold imports have come down substantially due to which, the CAD will be comfortable. That would give comfort to the rupee against the dollar,” said the head of treasury of a public sector bank.

The CAD for the third quarter of last financial year widened to a record high of 6.7 per cent of gross domestic product, as against 5.4 per cent in the previous quarter.

Experts are of the view RBI will continue to intervene, even going forward despite depleting forex reserves.

“RBI’s ability to intervene with cash is limited. They could, at best, slow down the speed of depreciation. Having said that, RBI cannot remain a silent spectator and they have to be seen to be doing something to cool down the heat,” said J Moses Harding, executive vice-president at IndusInd Bank.