FY14E/FY15E Rupee-US Dollar Rates - Likely To Average At Rs60.5/US$ In FY14 - Nirmal Bang

We expect the Indian rupee to appreciate from its current level and end FY14 at Rs61.8/US$. We feel it will average at Rs60.5/US$ in FY14 and at Rs59.6/US$ in FY15. The appreciation to Rs60.5/US$ in FY14 will primarily be on account of foreign inflows after the deferment of tapering of Quantitative Easing-3 (QE3) programme by the US Federal Reserve (Fed) and a decline in India's trade deficit (mainly because of the recent curbs on gold imports and falling non-crude oil imports since April 2013). The recent measures taken by the Reserve Bank of India (RBI) to attract inflows from non-resident Indians (NRIs), the swap facility provided by RBI to state-owned oil marketing companies to meet their forex requirements and domestic banks in a position to raise capital overseas by maintaining the required Tier-I capital as per Basel II norms will positively affect the rupee-US dollar rate and bring it down from the close of Rs62.8/US$ on 24 September 2013. We expect India's current account deficit (CAD) at US$72.3bn in FY14.

Reasons behind our FY14 rupee-US dollar estimate of Rs60.5/US$:

- After the Fed's decision to defer the tapering of its QE3 programme, the liquidity tap is open again for all emerging economies (EMs) including India and this may be the case until a new chairman of the Fed is appointed in January 2014. We believe the QE3 tapering and increase in interest rates are distant objectives for the Fed. The Fed tapering its bond purchase programme is based on improvement in three key parameters and their evolution over time, viz. unemployment, inflation and growth. However, when all the three parameters are expected to remain below the Fed's desired level in 2013 and are likely to improve only in 2015, the Fed scaling back its bond buying programme is unlikely. The US unemployment rate has been falling only gradually since January 2012, remaining sticky at 7.3% in August 2013 compared to 7.5% in April 2013. This level is nowhere close to the Fed's target of achieving an unemployment rate of ~5.9% to 6.2% by 2015. Therefore, we believe the Fed's accommodative monetary policy is unlikely to come to an end by mid-2014.

- The liquidity tightening measures adopted by the RBI to curtail volatility in the foreign exchange market gave some respite for the rupee. The Indian unit was under pressure due to high trade deficit in April-June 2013 (before it started improving in July-August 2013) and also on an announcement by the Fed on 19 June 2013 about its plan to taper the QE3 programme. The negative sentiment led to panic in global markets - stock, bond, currency as well as commodity markets - and emerging economies feared the outflow of foreign money adversely affecting their currencies, which depreciated by around 10%-15% as of end-August 2013 from their levels on 19 June 2013. To cite an instance, the rupee depreciated by around 11.9% as of end-August 2013 from 19 June 2013 and eroded only 6.3% as of 23 September 2013 from 19 June 2013 - as it appreciated from the level of Rs68.8/US$ touched on 28 August 2013 to Rs62.4/US$ on 23 September 2013. Foreign institutional investors (FIIs) pulled out ~US$9.0bn from equity and debt markets in India in a span of 50 working days - 19 June 2013 to 30 August 2013 - and have pumped in ~US$1.7bn so far in September 2013. As a result, there was drawdown in foreign exchange reserves to the tune of US$12.5bn, which touched a three-year low of US$275.4bn on 13 September 2013.

- Improvement in the CAD, compared to FY13, mainly on the back of curbs on gold imports by the RBI and the government, with gold imports as a percentage of total imports in FY13 standing at 11%. Gold imports in FY14 are likely to drop on the back of restrictions on investment in gold bars and coins and a steep hike in customs duty on gold imports. Gold imports, as a percentage of total imports, are expected to decline to ~8% in FY14.

- We expect the rupee to average at Rs60.5/US$ in FY14, but the uncertainty among foreign investors about the Fed's QE3 taper plan and its impact on global liquidity as well as their risk appetite poses downside risks to our estimate.

Source : Equity Bulls

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