India’s efforts to curb imports, improve exports and attract greater remittances may help it almost fully fund its current account deficit (CAD) this fiscal, and also help the rupee recover to 61-level against the US dollar in the next 6-12 months, according to a Barclays report.
The projection came on Friday even as the rupee rose marginally to 64.30 in early trade following Thursday’s all-time low of 65.56.
“We expect the INR at 61 per dollar in 6-12 months, which partly reflects the current account improvement,” Barclays said in a research note.
According to the global financial services major, the country’s CAD — the difference between the outflow and inflow of foreign currency — has the potential to “surprise favourably”.
The factors narrowing the current account gap include a lower merchandise trade deficit (gold and non-oil, non-gold trade), a steady uptick in services exports and remittance flows, it said.
On Thursday, finance minister P Chidambaram had said the government would make all efforts to contain fiscal deficit at 4.8% and CAD at 3.7% of GDP or $70 billion this financial year.
The government’s efforts come amid deepening worry over the rupee’s slide.
Hit by the US Federal Reserve’s preparations to wind down monetary stimulus, which is driving up borrowing costs globally, rupee has lost 17% since May and the stock market is close to its lowest in 12 months.
Chidambaram has called for calm and said there is no need to panic. “We believe that rupee is undervalued and has overshot what is generally believed to be a reasonable and appropriate level.”
The finance minister has also stressed there is no need for excessive or unwarranted pessimism. “There is no cause for panic that seems to have gripped the currency market and that is feeding into other markets. We are confident that stability will return to these markets and we can get on with the task of promoting investment and growth.”
A sliding rupee is toxic. For a start, it means that India needs to shell out more cash to import fuel, and this in turn raises the prices of transporting goods, leading to higher inflation.
And high inflation means that the Reserve Bank of India (RBI) will hesitate to cut interest rates, a step needed to boost economic growth.
So consumers need to keep paying large chunks of their income every month towards repaying housing loans, even as the cost of food and petrol rises and the prospect of decent salary hikes recedes because the economy is struggling.
Amid the slide, the Deutsche Bank had said in a research note on Wednesday the rupee could touch 70 level in a month’s time.
The fall of the rupee is derailing India’s hopes of raising more than $6 billion from the sale of stakes in state-run firms, jeopardising a key plank of Chidambaram’s blueprint to reverse the country’s economic malaise.
Investor confidence has evaporated amid fears over the rising cost of funding India’s CAD, prompting New Delhi
to delay plans to raise much-needed funds through partial privatisations, according to finance ministry sources.