Mumbai: The fall in current account deficit (CAD) will give support to the rupee, a research report by brokerage firm Nomura said.

"The narrowing of the current account deficit in Q1 of FY13 highlights the reduced hurdle for rupee to perform.

Indeed, given the ongoing strong momentum in domestic reforms, liberalisation, fiscal measures and global policy stimulus, we expect capital inflows to offset the dollar demand," the report said.

"With spot rupee having broken through the 53-figure, we expect the 52-figure to be the next target," it added.

CAD, which is the difference between the forex earned and expended, has reduced to 3.9 percent of GDP in the first quarter of this fiscal (Q1-FY13) against 4.5 percent recorded during Q4 of FY12 on the back of slowing imports.

In absolute terms, the CAD reduced to USD 16.6 billion in the first quarter against USD 21.8 billion in Q4 of FY12.     Pointing out the rationale behind strengthening of rupee, the report said that the likely reform measures by the government in the near future along with disinvestment would support the currency.

"The main rationale is that we see scope for further positive news or events before the end of October, including disinvestment schedule for public sector undertakings, further liberalisation measures (including discussions on FDI
insurance bill) and creation of the National Investment Board," it said.

The report, however, maintained that the medium-term risk remained for the domestic currency on the back of global economic uncertainty.

"In the medium term, we expect INR to depreciate on the back of uncertain global growth backdrop largely due to the economic and political risks emanating from Europe. Locally, the fundamental imbalances in the economy would constrain monetary policy stimulus," it said.

"With inflation and fiscal deficit still structurally elevated, the risk is that rupee will bottom out towards the end of 2012 and rise through 2013 to new record highs again," the report added.


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