The rupee is expected to strengthen from current levels (of about 59.75 per dollar) and settle at around 56 per dollar by end-March 2014, according to Crisil Research.
The appreciation will mainly be driven by resumption of FII inflows, it said.
The FII flows, in turn, will be driven by two factors. First, 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 Quantitative Easing.
Second, the Government is pledging a slew of domestic policy reforms to shore up domestic and foreign investor sentiments. This will act as a pull factor for foreign capital inflows.
Crisil Research expects current account deficit as a per cent of GDP to be lower in 2013-14 vis-à-vis last year.
Despite the expected appreciation, the rupee is likely to remain volatile and end the fiscal year on a weaker note (Rs 56/USD) than earlier expected. This is because the quantum of capital inflows will be lower as the Federal Reserve winds up its bond buying program later this year.