Friday, January 4, 2013

Rupee (INR) - Dollar (USD) Outlook: 2013

Exporters, Importers and FIIs would certainly not hesitate to pay even a billion dollar if anyone can tell them where Indian rupee would be against USD at the end of 2013. Putting a number to this equation is as difficult as it to guess if world would end in 2013 instead of 2012. Humor apart, instead of wasting energy in guessing a number if we can broadly estimate what could happen in next one year it will be equally helpful in taking informed decisions.

InvestorZclub feels that year 2013 is going to be bad for Indian Rupee in spite of nearly 20 percent depreciation against the US dollar in past 2 years. Just consider following points:

1. Quantitative easing in US is likely to reverse to some extent if not significantly, considering the debt pile up that has happened in past 4 years. Now the time for gradual repay has come which will make dollar stronger against most of the currencies globally. As a result dollar index will go up and Indian rupee will depreciate in that proportion.

2. Lack of fresh liquidity from US and debt repayment might impact Indian Stock Markets leading to outflows from FIIs which will put significant pressure on Indian currency. FIIs poured in record $23 billion into Indian Stock Markets in 2012 which is not likely to repeat in 2013. Instead there is a possibility of minor outflow this year. 2013 is also the last year of present Govt and this being an election year FIIs might want to stay on the sidelines.

3. Weaker rupee in 2012 did not helped in bringing more exporters which led to a record current account deficit which is expected to be around 4.3 percent for the financial year ending 31st March 2013. Part of the CAD was met by FII inflows which helped in keeping the INR afloat and manage to hold on to the levels of 55. But this inflow is expected to be absent in 2013 and thus there will be significant pressure on INR due to huge current account account deficit that India might witness again in 2013. However if Oil prices falls sharply and brent crude stays below $90 in average for 2013, this will significantly reduce the CAD burden.

4. High fiscal deficit of north 5.5% for this financial year will also put pressure on Indian currency.

5. High Inflation differential of 5 percent or more (7% inflation in India vs 2% inflation in US) theoretically makes our currency weaker by 5%. Hence by this calculation alone the INR should close the year near 57 against USD.

So considering all the above factors, it seems that sub 50 level is a thing of the past for at least couple of years now and we have to learn to live with INR in the range of 54 - 58 against USD. However if things reverses dramatically such as India witness huge FDI and FII inflows again in 2013 coupled with significant fall in brent crude prices, rupee might appreciate a bit and could end the year near 50.

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