Will the rupee appreciate sharply from current levels?

The rupee appreciated sharply on Thursday, owing to the US Federal Reserve’s decision not to taper its bond-buying programme.

Experts said within a month, the currency wouldn’t strengthen from current levels.

On Thursday, the rupee ended at a month’s high of 61.78/dollar, against its previous close of 63.39/dollar.

A median forecast poll of 10 currency experts by Business Standard shows the rupee is expected to trade at 61.5/dollar in a month.

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Experts said this was because concern on growth remained. Many experts believe the Reserve Bank of India may start buying dollars to boost its reserves, which have been depleting in the last few months.

“The rupee should ideally trade at around the mid-point of 60-65 (62.5), given the lack of clarity and complexities in domestic macroeconomic. The delay in quantitative easing tapering is only near-term relief, giving bandwidth and time for RBI and the government to address structural woes revolving around growth, inflation and the twin deficits,” said J Moses Harding, executive director and chief business officer at Lakshmi Vilas Bank.

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India’s gross domestic product (GDP) grew 4.4 per cent in the quarter ended June this year, compared with 4.8 per cent in the previous quarter.

Market participants say policymakers should address the country’s high current account deficit (CAD), the primary factor behind the rupee’s weakness. 

For 2012-13, CAD stood at a record 4.8 per cent of GDP, above the central bank’s comfort zone of 2.5 per cent. RBI expects this financial year, too, CAD would exceed 2.5 per cent.

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In the recent past, RBI has been selling dollars heavily to arrest the rupee’s depreciation. India’s foreign exchange reserves fell $685.1 million to $274.81 billion in the week ended September 6, RBI data released on Friday showed.

“Now, RBI may start buying dollars from the market to boost reserves and bring it back to about $300 billion,” said Mohan Shenoi, president (group treasury and global markets), Kotak Mahindra Bank.

Economists said boosting foreign exchange reserves was the key to the rupee’s stability. At $274.8 bn, foreign exchange reserves could provide import cover for six and a half months. It is felt foreign exchange reserves that can provide an import cover for eight-10 months could stabilise the currency.