Global financial services major HSBC has revised year-end forecast for Indian Rupee to 66 from 69, citing "improved domestic backdrop" and said the domestic currency will steadily strengthen against the dollar.
According to HSBC, lower currency volatility has been an important attribute for the Rupee and has had the positive effect of boosting confidence and providing a stronger foundation for India to attract long-term investment.
"Considering INR’s relatively low volatility, attractive yields and improving fundamentals, the Indian Rupee appears to be one of the most attractive carry currencies on a risk adjusted basis," HSBC said.
The Rupee is hovering around 66.86 a dollar level.
"We believe the room for USD-INR to move significantly lower over the coming months is limited given the RBI’s forex policy," HSBC said in a research note, adding as such, we don’t envisage the Rupee to weaken substantially from here and instead believe it will steadily strengthen against dollar.
Meanwhile, the government’s reform initiatives has also played its part in attracting investments and one such reform — the GST bill — is expected to attract more FDI.
HSBC’s economists believe the GST could provide an additional 80 bps to GDP growth over the next few years. An increase in growth prospects and signs that the government is finally able to push through difficult reforms should provide an additional boost to portfolio flows, particularly in the equity market.
Moreover, there are signs that the country’s balance of payments scenario is improving. By the end of March, India’s current account deficit had narrowed sharply to 0.1 per cent of GDP, in part due to seasonal effects but also thanks to lower oil prices.
The combination of robust foreign direct investment and a narrowing current account deficit now means India boasts a core balance equivalent to over 1.6 per cent of GDP, a rare feat among the higher-yielding emerging market currencies, the report added.
"On the back of this improved domestic backdrop and broader carry environment, we revise our end-2016 forecast for USD-INR to 66 from 69 previously," HSBC said.