Rupee may hit 58 if a new stable government emerges

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Rupee may hit 58 if a new stable government emerges
The next fortnight might see immense bouts of volatility in the currency, ahead and after the election results are known.

Analysts are betting on the currency hitting 58 levels if we have a stable government in place. A stable formation would mean that the Narendra Modi led NDA getting anywhere in excess of 230 parliamentary seats.

A number significantly below this could see a depreciation in the rupee, although a capitulation of the currency is ruled out because of better economic fundamentals, including the vastly improved current account deficit. Read more on current account deficit here

At the current level the rupee is fairly valued

The gains in the rupee will not only be because of a stable government, but also on account of the improved current account deficit. In fact, India's current account deficit has shrunk to just 1.3 per cent for the December quarter from about 4.8 per cent in the corresponding period of last year.

This is largely on the back of measures like forex swaps and gold import curbs introduced by the RBI and the government.

RBI may not let the rupee appreciate

Beyond levels of 58, the Reserve Bank of India will not want to let the rupee appreciate and will start buying dollars. This is largely to ensure that the currency benefits exporters and they remain competitive in the global context. The RBI has already shored up its reserves in the last few months, by buying dollars and ensuring the rupee does not appreciate dramatically.

While the RBI has made it clear in the past that it would intervene in the forex markets to remove volatility, the country's central bank might not want to let the rupee appreciate.

The only threat to the rupee currently could come from foreign fund outflows, due to an external event or geo-political tensions across the globe.

Read more about: dollar
Story first published: Tuesday, May 6, 2014, 8:52 [IST]
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