The rupee is likely to average 69 per US dollar in this financial year, largely driven by stronger domestic macro fundamentals and foreign fund flows, says a report.

According to a Bank of Baroda research report, India’s twin deficit and inflation are at a “far more comfortable position” than in 2013. Besides, a recent fall in oil prices and strong foreign portfolio investors’ (FPI) inflows will also support the domestic currency.

“While near-term volatility cannot be ruled out as the rupee is highly correlated with other Asian emerging market (EM) currencies, we believe the rupee should stabilise sooner than later,” Sameer Narang, chief economist at Bank of Baroda said in a research note. He further said, “For FY19, we expect it to average at 69/USD”.

The rupee has fallen 8.9 per cent this year, higher than the 4.6 per cent fall in Asian emerging market currencies amid global uncertainties and concerns over inflation. The rupee ended below the 70-mark against the US dollar for the first time ever on August 16.

According to the report, the policy divergence between the US Fed, the European Central Bank (ECB) and Bank of Japan (BoJ), coupled with an improving US economy, has resulted in widening interest rate differentials between the US and other currencies.

But going forward, other central banks are looking at normalising their monetary policies and this will narrow the interest rate differential and put a lid on further appreciation of the US dollar, the report said.

The recent decline in oil prices is positive for the rupee. In addition, FPI inflows have also resumed and should put an end to the $24.6-billion intervention by the Reserve Bank of India.

Some of the key risks to the rupee include a contagion in emerging market currencies, any geo-political risks to oil prices and prospects of trade wars driving global growth lower, the report added.

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