Mumbai: Foreign brokerage HSBC has said it expects the rupee to trade at 60-levels by December against the dollar even though risks on the domestic unit from both external and domestic fronts have increased. “We maintain our year-end view for the rupee at 60 but the risks are building and the rupee faces greater headwinds ahead,” the brokerage said in a note.
It said deterioration in the external sentiment through events like the end of US Fed's tapering and increased geopolitical risks, coupled with fears of softening in reform expectations on the domestic front, are the key downside risks to the currency.
Because of the reliance on the volatile capital flows for the currency, the rupee is also more exposed to vulnerabilities than most other Asian currencies due to the current account deficit, it said.
After being stable for over three months, the rupee has been losing ground against the dollar over the past week and ended at 61.74 against the USD on Friday. According to some reports, the RBI had to intervene to arrest further damage to the currency in some trading sessions during the week.
The British brokerage said even though the RBI has built up sizable reserves in the wake of stability in the currency—the forex reserves are skirting around the all-time high of USD 321 billion—it is unlikely to use those for defence of a level.
“It is highly unlikely that the RBI would draw a line in the sand, especially if the dollar is strengthening against emerging market currencies more broadly,” it said, adding that the willingness to defend a level will not be as strong as last year, when it touched an all time low of 68.85 to dollar on August 30, 2013.
It, however, said factors like its ongoing fight against inflation may push the RBI to defend, if there is a volatility in the rupee.
The country's reliance on portfolio flows, rather than the more stickier foreign direct investment flows, is also a negative factor, it said.
During the year, the country has attracted USD 26 billion inflows in equity and debt markets, while there was an accretion of USD 25 billion into the forex reserves, which resulted in reduced volatility in the rupee. Notably, after the US Fed's announcement of starting to taper its bond buying programme on May 22 last year, the rupee had become one of the worst hit currencies globally. It took unconventional moves from the RBI and the government to arrest the fall.
