The rupee is expected to recover from its current level to 60 to a dollar by March 2014, according to a report by Crisil Research.
The strengthening of the rupee will be driven by expectations of the CAD falling to 3.9 per cent of GDP in 2013-14 from 4.8 per cent last year. Current account deficit is expected to correct significantly in the second half of the year due to a decline in non-oil imports, including gold, Crisil said in the report.
Also, foreign capital inflows are expected to pick up in the second half of the year, the report said. This follows the steps announced by the Government to attract $11 billion in capital inflows. The steps include via foreign borrowings by state-owned financial institutions and public sector oil companies and measures to attract non-resident deposits, the report said.
“Our revised forecast of CAD is lower than our previous estimate of 4.2 per cent mainly due to expectations of a sharper slowdown in non-oil import growth, led by a near 28-30 per cent fall in gold imports,” Crisil said.
The rupee had plunged to 65.65 to a dollar on Thursday on persistent demand for dollars and concerns surrounding the funding the CAD amid heavy capital outflows following a possible pull-back of quantitative easing in the last quarter of 2013.
However, a sharp recovery to 63.30 against the dollar on Friday has built the momentum for appreciation.
The Indian currency has fallen close to 20 per cent since May and about 10 per cent in August.
According to Crisil, despite a lower CAD, now estimated at around $71-72 billion, total foreign capital inflows in 2013-14 will be insufficient to cover it. As a result, the rupee will, on an average, be 12-14 per cent weaker in 2013-14, compared with the previous year.
Much of the inflows are expected in the second half on the back of government moves in this direction. This will result in the strengthening of the currency by March-end from the current 64-65/$, it said.