Rupee set to strengthen on easing inflation, lower CAD

Experts see rupee strengthening to 53 per dollar by end-December

The easing inflation, expectations of growth picking up, narrowing current account deficit (CAD) and now expectations of limited risks to a rating downgrade for India are set to strengthen the rupee against the dollar in the months ahead. The street expects the rupee to end calendar year 2013 at Rs 53 per dollar.

"We forecast the trade deficit to stabilise in the $15 billion range, which would likely result in a $185 billion cumulative deficit for fiscal year 2013-14 (lower than $198 billion in fiscal year 2012-13). We also think that exports of both goods and services are likely to pick up this year, allowing the CAD to ease to $80 billion (3.8 per cent of gross domestic product) in fiscal year 2013-14. This also means we remain constructive on the rupee, expecting it to close 2013 at 53 to the dollar," said Taimur Baig and Kaushik Das of Deutsche Bank in a report.

Besides these factors, economists feel the limited risks to a rating downgrade for India will also help the rupee against the dollar. "The probability of outlook improving from negative to stable is much higher. We see limited risks of a downgrade. That will also be rupee-supportive," said Shubhada Rao, chief economist, YES Bank.

On Friday global rating agency Standard & Poor's affirmed its 'BBB-' long-term and 'A-3' short-term unsolicited sovereign credit ratings on India and said the outlook on the long-term rating remains negative. According to the rating agency, the negative outlook signals at least a one-in-three likelihood of a downgrade within the next 12 months.

The rupee ended at Rs 54.89 per dollar on Friday, weaker than the previous close of Rs 54.79. Since mid-2011, the rupee has been under pressure due to weak economic fundamentals. However, Tushar Poddar, managing director and chief India economist, Goldman Sachs, is of the view that India's fundamentals appear somewhat better due to easing inflation and growth having bottomed out. "We find that historically improving growth tends to lead to rupee strength, as does a fall in inflation. Therefore, we think the depreciation pressures on the rupee are lessening," said Poddar.

In a span of one year the rupee may even strengthen to Rs 52 per dollar. "While there remain near-term concerns due to an elevated trade deficit, especially if we were to get a bout of global risk aversion, beyond three months we see appreciation pressures due to improving fundamentals. Our three-, six- and 12-month rupee per dollar targets remain at Rs 55, Rs 53, and Rs 52, respectively," added Poddar in his report.