CRISIL Research, in the base case scenario, expects the rupee to appreciate to around 50 per dollar by March-end 2013, from the current levels (Rs 56.3 per dollar as on June 29, 2012). Crisil assigns two-in-three chance to this event. The key underlying assumptions include the initiation of some domestic policy measures to revive growth, no further worsening of our expectation of growth and inflation and an easing of current account deficit due to softening of crude and commodity prices- all of which could improve investor appetite. Some improvement in the Eurozone situation in the first quarter of 2013 is also accounted for, which will stimulate return of capital flows into Indian markets.

In the alternate scenario, CRISIL Research expects the rupee to settle around the current levels of 55-57 per dollar by March-end 2013 and assigns one-in-three chance to this event. This scenario assumes a status quo in domestic policy setting, and no change in the Eurozone problems and the ongoing global turbulence. Although the pressure on current account will ease to some extent, due to lower global crude oil prices and declining gold imports, muted foreign inflows will maintain the depreciation pressure on the rupee.

As per the analysis carried out by the research firm, the current episode of rupee depreciation is characterized by higher impact of India's rising vulnerability and relatively lower impact of external shock. Vulnerability of the rupee arises from a widening current account deficit, declining import cover of foreign exchange reserves, a high private corporate debt servicing burden and slower growth. The shock element as yet, however, is less severe this time than in 2008-09 as a global crisis of the magnitude of Lehman episode (which triggered huge capital outflows) has been avoided so far. Higher the vulnerability, greater is the impact of a shock on the currency. Even a lower shock, therefore, resulted in swift depreciation of currency in the last few months.
 

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