'Pullback in rupee likely by Dec on CAD improvement'

Factors that likely to keep USD-INR under pressure include challenging global economic scenario

 

The rupee is likely to again touch the 68 mark per US dollar by this month end, after which it could strengthen due to improvement in the current account deficit that could help pause the American currency's rally, according to a Standard Chartered report.

The factors that are likely to keep USD-INR under pressure include challenging global economic scenario due to concerns over US Fed's tapering its bond buying and upside risks to oil prices arising from Middle East turmoil, it said.

The rupee had touched an all time low of 68.80 to a dollar on August 28. However, it has strengthened from its all time low levels and is hovering at 66/USD.

StanChart expects the rupee to be around 68 per US dollar by the end of July-September quarter, significantly higher from its earlier projection of 59.

Similarly, for the October-December quarter it hopes INR at around 64/USD (up from (60.50/USD earlier).

The report said India's CAD is expected to narrow substantially for the rest of the year and once this trend is visible, investor pessimism towards India is likely to recede, providing some stability to the rupee and an opportunity for the Reserve Bank to ease liquidity conditions.

It added: "India's CAD is narrowing; we expect this, along with a pause in the USD rally, to push USD-INR lower in Q4, although election worries linger in the background.

"Markets are likely to refocus on India's fundamental potential once Fed tapering risks are priced in and general elections (scheduled by May 2014) are over. We expect structural positives to underpin investor optimism in Indian assets and the INR over the medium term."

StanChart has raised its medium-term forex weighting on the INR to "overweight", as valuation and growth potential should attract capital inflows.

"While India's potential growth rate has likely dipped to 6-6.5%, the drivers of a return to 8% plus growth remain in place," it said, adding that "reforms are slowly picking up and should gather pace once elections are completed".