Rupee likely to return to 55-57 range in the medium term - ICICI Bank : Treasury Research

The sharp depreciation in the Indian Rupee is part of the broad based sell off across EM asset classes.

The expectation regarding Fed tapering its asset purchase program has led to the stronger US Dollar and created volatility in the currency markets. Overall, the selloff was more pronounced in the case of emerging markets currencies as compared to the developed markets.

Our sensitivity analysis suggest that the Brazilian Real (BRL) and Indian Rupee (INR) have been the most sensitive currencies to Dollar moves.

The sell off across EM economies was led by capital outflows, broadly in equities as well as debt. However, the trend has been relatively mixed for India. Though we witnessed debt related outflows to the tune of USD 3.3 bn (since May 22nd 2013), equity related capital flows were relatively positive at USD 1.0 bn.

On the macro economic data front, India stands out as the economy with the highest trade deficit in the EM space. However, on the other parameters i.e. GDP growth, industrial production and inflation, India is relatively well placed vis-à-vis some of the other EM economies. Going forward, we expect India's macro economic fundamentals to improve in FY2014, enhancing India's attractiveness vis-à-vis other EM peers.

Overall, we believe that the sharp depreciation in Indian Rupee is overdone and expect it to return toward the 55 to 57 range in the medium term.

Though we believe that Fed will start tapering its asset purchase program toward the end of the year, any early withdrawal poses a key risk to the outlook.

Source : Equity Bulls

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