The Finance Ministry hopes that the rupee may strengthen to 50 against dollar in a few months time. The Government also hopes to keep the fiscal deficit to the Budget target.
This hope has come at a time when rupee closed at a five-month high of Rs 52.85 against the dollar on Friday. The rupee dipped to all time low at Rs 57.13/dollar in June. The Department of Economic Affairs Secretary Arvind Mayaram said, “Today it has breached Rs 53. It has gone below Rs 53. This brings down the subsidy requirement, especially in the petroleum sector. With the steps the Government is taking, we expect it could even touch Rs 50 in the next 2-3 months or four months, in which case our subsidy burden will go down even further.”
Appreciation in rupee is expected mainly because of higher inflow not just into the stock market but also through foreign direct investment. There is also some impact expected due to announcement of quantitative easing (QE 3) by the US Federal Reserve. Euro gaining strength after Spain announced tough new austerity measures is also helping the rupee gain against the dollar.
Although he refused to give details about reduction in fuel subsidy due to appreciation of rupee, Mayaram did admit, “One rupee change in exchange rate can bring about 80 basis point change in the rate of inflation.”
Meanwhile, forex experts differ on the Government’s estimation about the rupee.
Vivek Rajpal from Nomura termed this as “optimistic”. He said that the rupee has appreciated to Rs 52.50 from Rs 56. “This is a very big move and there is expectation that a similar trend will continue.”
His expected level is Rs 52/$ while Citi Group’s Maya Bhandari’s level is Rs 48 by the year end.
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