Rupee may rise to 56/USD by March, says Crisil

Moneycontrol Bureau

Amidst a raft of bad news, here is the relieving news.

Rating agency Crisil, the domestic arm of S&P, expects the Indian rupee (INR) rising about 56 against the US dollar by March, 2014. Key triggers: capital inflows resume and current account deficit (CAD) softens in 2013-14.

"The appreciation will mainly be driven by resumption of FII inflows, which in turn, will be led by two factors. Firstly, we believe, the current capital flight from India is a short term phenomenon and is largely in response to the uncertainty surrounding the impact of the Federal Reserve's pullback of QE. Secondly, the government is pledging a slew of domestic policy reforms to shore up domestic and foreign investor sentiments," it said in a report.

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This will act as a pull factor for foreign capital inflows. And finally, we expect current account deficit as a per cent of GDP to be lower in 2013-14 vis-à-vis last year. We therefore, expect trade deficit to narrow going ahead and lower pressure on the rupee.

INR slumped to a record low of 59.98 against the US dollar on June 20 throwing a fresh challenge to the authorities to revive the flagging economy. The local currency tanked more than 9 percent since the beginning of May.

With India's external vulnerability on the rise, global risk appetite and liquidity matter more than ever for stability of the rupee. Of late, even smaller external shocks are causing massive volatility in the currency, Crisil said.

"The key external monitorable for direction of the currency is the stance of developed countries, particularly the US, on withdrawal of quantitative easing (QE). On the domestic front, pushing through key policy reforms that will revive the economy, bolster investor sentiments and attract foreign inflows will be the key monitorable," Crisil said.