Mumbai: American investment bank and leading brokerage house Goldman Sachs on Wednesday said it sees the current rally in the rupee to continue with the currency closing the year at Rs 51 to the US dollar on account of improving CAD and recent reforms by the government.
It has pegged the Current Account Deficit at 3.5 percent for the ongoing fiscal.
"We remain positive on the rupee due to an improving CAD (current account deficit) and greater capital inflows, in part due to the recent reform efforts by the government, as well as the global easing of liquidity. We maintain our 12-month rupee target at 51 to the dollar," Goldman said in a note Wednesday.
Stating that CAD had peaked last fiscal, it said, "We continue to maintain our earlier forecast that the CAD may have peaked in FY'12, and will likely trend down due to the sharp rupee fall. We expect the FY'13 CAD at 3.5 percent of GDP, down from 4.2 percent in FY'12."
The rupee has been gaining since July, after hitting a life-time low of 57.13 in mid-June. Since the beginning of the year, the local currency has gained over 7 percent, and still it is down 18 per cent from its pre-August 2011 highs. The rupee closed 2011 as the biggest loser among the BRIC currencies and still continues to be so.
The CAD, which is the difference between foreign currency earned and expended, touched a historic high of 4.3 percent of GDP for the full year in FY'12, while in Q2 of last fiscal it had touched a whopping 4.5 percent of GDP.
Describing the improvement in balance of payments situation in Q1 as on "expected lines", Goldman said while CAD in Q1 was higher than consensus expectations, it was an improvement over Q4, leading to a positive balance of payments (BoP).
"While the CAD still remains high, we continue to believe that it may have peaked in FY12 and can continue to improve in FY13," Goldman said.
The 1Q CAD stood at USD 16.4 billion or 3.9 percent of GDP, while the BoP rose to USD 0.5 billion.
The CAD was at 3.9 percent, compared to the Q4 of last fiscal. Though the reading came in worse than our consensus expectations, the report is mixed as the trade balance has improved, even though the services balance and external debt ratios worsened, the Goldman note said, adding that both goods exports and imports declined.
Within imports, gold and silver declined 47.5 percent y-o-y and growth in non-oil, non-gold imports continued to slide, coming in at 0.3 percent y-o-y, reflecting the slowdown in domestic demand, due to the hike in customs duty on gold and a sharp fall in the rupee.
However, it said the dip in services exports has been greater than its expectation.
Explaining the reasons for the better BoP, the report noted that during the Q1, while FDI rose, portfolio flows declined by USD 1.9 billion, due to risk-averseness in markets.
The deregulation of interest rates on NRI deposits continued to bring inflows (USD 6.6 billion) against USD 4.7 billion in 4Q of FY12 and USD 1.2 billion in 1Q of FY12. All this led to an overall BoP surplus.
But, it pointed out that the higher NRI deposits also means that external debt rose further to USD 350 billion, an increase of USD 3.9 billion over the last quarter.
Short-term debt as a proportion of total debt too rose 40 bps to 23 per cent, and as proportion of forex reserves rose 120 bps to 27.8 percent.