Indian Rupee Could Trade at 63 to the Dollar in 12 Months: Goldman Sachs

Indian rupee could trade at 63 to the US dollar in 12 months: Goldman Sachs.Reuters

The Indian rupee could trade at 63 to a US dollar in 12 months, according to a Goldman Sachs report.

The Goldman forecast rests partly on an anticipated increase in India's current account deficit (CAD) during the financial year 2014-15.

"We expect the current account deficit to rise gradually in [fiscal 2014-15] to 2.6% of GDP due to a gradual increase in imports on better domestic demand as well as some relaxation in gold import restrictions by the new government," the report said.

Rupee-Dollar

The partially convertible rupee finished at 59.10/11 to the US dollar on 30 May as against 59.03/04 on 29 May.

For the week, the rupee shed 1% but has gained 2% for the month as a whole.

Rupee Stability

India's CAD, foreign fund inflows into the country and the amount of forex reserves it holds are among the several factors that influence rupee stability.

A current account deficit or trade deficit occurs when a nation's payments to other countries exceed the amount it receives.

The Indian economy is heavily dependent on imports, particularly of oil and gold.

Payments to other countries are made in foreign currencies. As such, rupees have to be sold to make those payments and any surge in the sale of rupees leads to a fall in the value of the currency.

When foreigners invest in India, they sell dollars and buy rupees and therefore higher foreign fund inflows have a positive impact on the rupee's valuation.

India's central bank, the Reserve Bank of India (RBI), sells or buys dollars to control the rupee in a volatile environment. The dollars come from the RBI's reserves.

The RBI's forex reserve stands at about $15.5bn. A higher forex reserve gives the central bank greater powers to intervene in the market to control the rupee.

For the financial year 2013-14, India's average CAD was 1.7% of the GDP as against 4.7% of the GDP in the previous fiscal -- CAD dropped on a sharp contraction in imports, particularly gold imports.

The rupee slid past the 68 mark in August 2013 amid concerns about the then government's ability to tackle a widening fiscal deficit and on concerns surrounding the country's economic slowdown.

The RBI's forex reserves stood at just $3.8bn in the 2012-13 financial year.