Rating agency Crisil said the rupee is likely to climb back to around 56 to the dollar by the end of the fiscal, on the back of spurt in capital inflows and improvement on the current account deficit front.
"We expect the rupee to appreciate from the current lows to about 56 by March-end as capital inflows resume and current account deficit softens this fiscal," Crisil said in a report.
The agency said the current capital flight from the country is a short-term phenomenon, largely an impact of possible tapering of economic stimulus by the US.
It also noted that the government is pledging a slew of policy reforms to shore up investor sentiment, which would attract capital inflows.
On the CAD front, which is likely to close the last fiscal at over 5 per cent of GDP, the report said: "It expects current account deficit as a percent of GDP to be lower this fiscal vis-a-vis
Crisil, however, noted that despite the expected appreciation, the rupee is likely to remain volatile and end the financial year on a weaker note than earlier expected.
"This is because the quantum of capital inflows will be lower as the Federal Reserve winds up its bond-buying programme later this year," Crisil said.
Rupee has dipped over 10 per cent since early May to close at an all-time low of Rs 59.68 because FIIs pulling out from debt as gains from investing in Indian fixed income securities shrink due to rupee depreciation.
The Crisil report also said as global liquidity tightens, large quantum of capital inflows (around $90 billion) are required to finance the external sector at risk and exposes the rupee to larger volatility.
"Over the medium-term, the government must focus on adopting policies that tame the CAD and those that ensure higher inflows of durable foreign capital investment to finance it.
"Speedy return to high growth on a sustained basis will be a critical pull factor. If this happens rupee can regain its long term appreciation bias."
