Swelling foreign exchange reserves and current account surplus have helped the rupee to remain stable since mid-March and the average value of the local currency is expected to be around Rs 75.98 per US dollar in the current fiscal, India Ratings and Research said.
The country's foreign exchange reserves rose to a lifetime high of $517.64 billion in the week ended July 17, 2020 from $476.88 billion at end-March 2020.
"It is this swelling of foreign exchange reserves that in combination with benign oil prices and tepid imports, leading to a current account surplus, has helped the Indian rupee to remain broadly stable since mid-March 2020, despite deterioration in some of the other macro parameters such as retail inflation, fiscal deficits and negative GDP growth," India Ratings and Research said in a report.
"We estimate the average value of rupee to be Rs 75.98/USD in FY21 (FY20- Rs 70.88/USD)," it added.
It said due to COVID-19, India witnessed a foreign portfolio investment outflow of $16.05 billion in March 2020 and $1.97 billion during April-May 2020.
However, unlike the episode of taper tantrum of 2013, the impact of foreign investors pulling their money out of India did not lead to any macroeconomic instability, the report said.
The agency said as the FY21 growth outlook is bleak and it expects the economy to contract 5.3 percent in FY21, both exports and imports could decline for the second consecutive year this fiscal.
"Therefore, we expect trade deficit to decline to a 13-year low to $101 billion in FY21 as against $157.5 billion in FY20," it said.
The report further said the country witnessed a surplus on current account in the fourth quarter of FY20 ($558 million, 0.1 percent of GDP) after a gap of 51 quarters.
The last time the country had witnessed a current account surplus was in Q4 of FY07 ($4,223 million).
The agency expects a current account surplus even in Q1 of FY21, as trade deficit declined to $9.12 billion and surplus in services trade during April-May 2020 was $13.98 billion.
"However, we estimate the current account to be in deficit of 0.1 percent of GDP ($3.3 billion) in FY21, which will be the lowest current account deficit in the last 16 years," the ratings agency said.