Why the rupee may not be headed to 70
The beleaguered rupee, which has pared back losses after breaching the 65 mark against the U.S. dollar last week, will head back to 60 in the coming months, according to Crisil, the Indian arm of global ratings agency S&P.
Crisil expects the currency to recover to this level by the end of fiscal year ending March 2014, helped by further narrowing of the current account deficit due to a decline in non-oil imports, including gold, the agency said in a recent note.
The rupee has been heavily hit amid growing concerns around the Federal Reserve scaling back its monetary stimulus, falling over 15 percent against the U.S. dollar in the past three months. Rapid depreciation in the currency prompted some strategists to forecast that it would fall as low as 70.
Crisil forecasts the country's current account deficit will narrow to 3.9 percent of gross domestic product in the current fiscal year - lower than an earlier estimate of 4.2 percent - compared with 4.8 percent last year.
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"Our revised forecast of current account deficit is mainly due to the expectation of a sharper slowdown in non-oil import growth, led by a nearly 28-30 percent fall in gold imports. We also expect capital and consumption goods imports to continue to moderate due to weak domestic demand," Crisil wrote.
Barclays, which expects the rupee to strengthen to 61 in the next six to 12 months, also believes the current account will surprise favorably this year, falling to 3.7 percent of GDP, or $68.2 billion, but noted it could fall to $57 billion "under an optimistic scenario."
"Given the present fragile market sentiment, the underlying improvements in India's current account may go unnoticed," the bank wrote in a recent report.
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Another form of support for the rupee will come from increased foreign capital inflows, Crisil said, as a result of borrowings by public sector companies abroad and improvement in non-resident Indian deposits.
Earlier this month, India announced measures to attract $11 billion in capital inflows including asking some state-run companies such as Indian Railway Finance Corp, Power Finance Corp and India Infrastructure Finance Company to sell debt abroad, and by raising money from Indians abroad, among other initiatives.
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"The third quarter of this fiscal [year] could see high volatility in the rupee if the U.S. Fed begins to taper out its quantitative easing program as scheduled. But the rupee could start seeing some recovery around the same time if the current account starts correcting and capital inflows begin to rise as a result of borrowings by public sector companies abroad and improvement in non-resident Indian deposits," it said.
—By CNBC's Ansuya Harjani; Follow her on Twitter