Will Rupee Touch 50 Against Dollar By Year End?

Bangalore: Rupee has hit a five-month high against dollar, which results in the experts’ opinion including brokerage firms such as Goldman Sachs and Nomura who expects its value to strengthen further and hold ground at 50 by the year-end.

The current rally in the rupee will continue with the currency closing the year at 51 to the U.S. dollar on account of improving CAD and recent reforms by the government, according to Goldman Sachs. The agency said in a note, “We remain positive on the rupee due to an improving CAD (current account deficit) and greater capital inflows, in part due to the recent reform efforts by the government, as well as the global easing of liquidity. We maintain our 12-month rupee target at 51 to the dollar.” Since CAD had sharp rise last year, it said, “We continue to maintain our earlier forecast that the CAD may have peaked in FY’12, and will likely trend down due to the sharp rupee fall. We expect the FY’13 CAD at 3.5 per cent of GDP, down from 4.2 percent in FY’12.”

There has been a gain in rupee since July after hitting a life-time low of 57.13 in mid-June. Ever since the starting of the year, the local currency has gained over 7 percent, and still it is down 18 percent from its pre-August 2011 highs. In 2011 the rupee closed as the biggest loser among the BRIC currencies and still continues to be so. The CAD, which is the difference between foreign currency earned and expended, touched a historic high of 4.3 percent of GDP for the full year in FY’12, while in Q2 of last fiscal it had touched a whopping 4.5 percent of GDP.

Brokerage firm Nomura added “The main rationale is that we see scope for further positive news or events before the end of October, including disinvestment schedule for public sector undertakings, further liberalisation measures (including discussions on FDI insurance bill) and creation of the National Investment Board.”

“In the medium term, we expect INR to depreciate on the back of uncertain global growth backdrop largely due to the economic and political risks emanating from Europe. Locally, the fundamental imbalances in the economy would constrain monetary policy stimulus,” it said. “With inflation and fiscal deficit still structurally elevated, the risk is that rupee will bottom out towards the end of 2012 and rise through 2013 to new record highs again,” the report added.