Rupee may strengthen through the year.
By R. Chandrasekaran
CHENNAI: The weak economic conditions and higher import bills for oil and gold have undoubtedly weakened the Rupee for close to two years. Now, the question among the non-resident Indians is whether the Rupee will continue to be weak or strengthen in the months to come.
There are several reasons to believe that Rupee will start strengthening in the months to come. There are at least two or three major factors that can support this theory. First and the foremost is there is a near unanimity among the economists and institutions such as International Monetary Fund or the World Bank that the Indian economy has bottomed out and should be able to pick up from the current levels.
Secondly, the commodity prices have cooled down compared to last year and this will have the potential to reflect lower import bills especially on oil. The government has also taken initiative to place curbs on import of gold and this will also discourage consumers from taking advantage of falling gold price thereby restricting import bill on this front.
The current account deficit also seems to have bottomed out in the fourth quarter though economists and experts continue to think that it still remains on higher level. However, the cooling of commodity prices and exports picking up in the coming months on the back of the government’s fresh sops could likely help the government improve the current account deficit situation.
Another important factor is that the government is clearing foreign direct investments much faster than a year ago. For this purpose, it has set up Cabinet Committee on Investment (CCI) for speeding the clearance of bigger infrastructure projects. This has resulted in clearing $27 billion investments worth so far this year. This apart, the government has also cleared the Swedish-based IKEA’s proposal to set up shops in India for approximately $1.95 billion.
Though the clearance does not mean an immediate inflow of foreign currency into India, it will certainly come in due course of time gradually. The foreign institutional investors’ (FIIs) investments in Indian equities have also reached $13 billion this year so far.
The Reserve Bank of India (RBI) has also reduced 75 basis points in interest rates in the current calendar year with the likelihood of cutting down another 25 basis points during their next meeting in June. The optimism stems from the considerable easing of inflation. Goldman Sachs has reportedly sees inflation coming down to 5.9 percent in 2013 compared to 7.5 percent in 2012 though it may not have any impact on the Rupee.
Therefore, looking from the various perspectives, it looks like that India will be better placed to attract more foreign currency this year than last year and this will likely have an impact on the Rupee versus the U.S. dollar. Goldman Sachs reportedly sees Rupee improving to 53 and 52 in six months and 12-month time, respectively.
While the lower interest rate will not likely have a major impact on the Indian Rupee, the NRIs normally takes into account the interest rate scenario before transferring money into India.
At the current level, the NRIs are likely to benefit for every U.S. dollar they transfer to India and park their funds in Indian banks. However, any major outflow by the FIIs from the Indian equity markets will result in Rupee weakening, which is not seen by analysts in the next few quarters.