Brokerage firm UBS Securities, in its latest report, said that the Indian currency is expected to trade within the range of 81/$-83/$ in the near term, with the potential to strengthen towards 79 a dollar by the end of FY 2024.

UBS notes that the Reserve Bank of India (RBI) has so far limited significant gains in the rupee to bolster its foreign exchange reserves as a precaution against global repercussions. However, the brokerage firm believes that as confidence grows from these reserves, the central bank may allow for some appreciation of the rupee later in 2023.

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The anticipated strengthening of the rupee is also attributed to a narrowing current account deficit and sustained foreign investments in the local equity markets. UBS projects India’s current account deficit for FY24 to narrow to 1.5 percent of GDP, down from the estimated 2 percent in FY23. This improvement is driven by a reduction in the trade deficit for goods, supported by corrections in global commodity prices, and the robust performance of services exports.

Notably, this projected current account deficit aligns comfortably within the sustainable threshold range of 2.1 percent to 2.3 percent of GDP estimated for India.

Since April, foreign investors have infused around $8 billion into the local equity markets, benefiting from improving macroeconomic factors. UBS suggests that the fiscal position of the Indian government appears favorable, with potential room for increased spending in a pre-election year. Higher-than-expected dividends from the RBI and robust collections from goods and services tax (GST) contribute to the government’s flexibility.

UBS also predicts a slight decrease in the consolidated fiscal deficit, encompassing both the central and state governments, to 9 percent of GDP in FY24. The central government’s fiscal deficit is estimated at 5.9 percent, while the states’ fiscal deficit is expected to reach 3.1 percent.

UBS maintains its base case outlook that the RBI will keep interest rates unchanged in the coming months. However, the brokerage firm anticipates a gradual easing cycle initiated by the RBI, potentially commencing in the March 2024 quarter, particularly if there is a shift in stance from the US Federal Reserve. Risks to this view include the possibility of a ‘higher for longer’ federal funds rate and potential inflationary pressures stemming from a potential El Niño phenomenon, specifically related to food prices.