Why the Indian rupee can hit 50 by March 2013

Crisil Research has come out with its report on the Indian rupee. According to the research firm, the rupee value is more sensitive to movements in the current account, a lower current account deficit in 2012-13 (aided by lower crude oil prices and dipping gold imports) will help strengthen the rupee.

The ratings agency says there is a 66 per cent chance that the India rupee will be trading at Rs50 vs. $1 (Rs13.61 vs. Dh1) by March 2013, while the remaining 33 per cent chances that it will be hovering at Rs55-57 vs. $1 (Rs15-15.5 vs. Dh1) in nine months from now.

“Crisil Research, in the base case scenario, expects the rupee to appreciate to around 50 per dollar by March-end 2013, from the current levels (Rs56.3 per dollar as on June 29, 2012). We assign two-in-three chance to this event,” the agency said.

Here are the five reasons it gives for its analysis of rupee @ 50:

1.The key underlying assumptions, according to the agency, include the initiation of some domestic policy measures to revive growth, no further worsening of its expectation of growth and inflation, and an easing of current account deficit due to softening of crude and commodity prices – all of which could improve investor appetite.

2. The agency also accounts “some improvement in the Eurozone situation in the first quarter of 2013”, which it believes will stimulate return of capital flows into Indian markets.

3. Crisil says that the recent steps taken by the government, if supplemented by another round of policy reforms, will see foreign investors flocking to the country’s markets once again. To aid the government’s efforts to boost the rupee, the Reserve Bank of India recently opened up the external commercial borrowing window for infrastructure and manufacturing industries to refinance their rupee debt by borrowing overseas. It also increased the investment limit in government debt to $20 billion for foreign investors, in an attempt to increase dollar inflows.

4. At the same time, improved risk appetite of foreign investors owing to a stabilising global economic landscape will lead them to consider the opportunity India offers, with assets in India being cheaper due to correction in prices and a sharply depreciated rupee, maintains Crisil.

5. In the alternate scenario, however, Crisil Research expects the rupee to settle around the current levels of 55-57 per dollar by March-end 2013 and assigns one-in-three chance to this event. This scenario assumes a status quo in domestic policy setting, and no change in the Eurozone problems and the ongoing global turbulence. In this scenario, it says that although the pressure on current account will ease to some extent, due to lower global crude oil prices and declining gold imports, muted foreign inflows will maintain the depreciation pressure on the rupee.

“Our analysis suggests that the current episode of rupee depreciation is characterized by higher impact of India’s rising vulnerability and relatively lower impact of external shock. Vulnerability of the rupee arises from a widening current account deficit, declining import cover of foreign exchange reserves, a high private corporate debt servicing burden and slower growth. The shock element as yet, however, is less severe this time than in 2008-09 as a global crisis of the magnitude of Lehman episode (which triggered huge capital outflows) has been avoided so far,” the report states.

“Higher the vulnerability, greater is the impact of a shock on the currency. Even a lower shock, therefore, resulted in swift depreciation of currency in the last few months,” it cites.

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