The Indian rupee will only make scant gains in the next 12 months as the economy remains weak, although optimism around a new government and a narrowing current account deficit will underpin the currency, a Reuters poll has found.
The rupee is among the best-performing emerging currencies this year, rising 4 per cent since January. It hit a one-year high of 58.25 against the dollar on May 22 - a week after Prime Minister Narendra Modi's landslide victory in general elections.
But analysts believe its rally is largely over.
The poll of over 30 currency strategists, conducted June 2-5, predicted one US dollar will fetch Rs 59.25 by the end of June, 59.20 in three months and 60.16 in a year.
Still, those are the strongest rupee forecasts in a long while. The consensus rose above 60 per dollar in the one- and three-month horizons for the first time since August and follows strong net inflows into the financial markets.
Over Rs 337 billon in foreign money poured into Indian stocks and bonds last month, up from almost nothing in April. The stock market is trading near a record high.
"Much of the rupee's gains in May (were) driven by post-election optimism via portfolio flows into both equities and Indian government bonds," wrote Derek Halpenny at BTMU, who is expecting the rupee to trade at 59 per dollar in a year. "Modi has been sending all the right signals so far, with considerations to allow at least 49 per cent of foreign investments into all sectors."
The ruling Bharatiya Janata Party, the first to win a majority in three decades, is expected to quickly pass key economic reforms and raise foreign investment caps in various sectors of the economy, including defence companies.
The first peek into the new government's policies will come around early July when Finance Minister Arun Jaitley unveils his maiden budget.
Recent data showing a sharp narrowing in the current account deficit to just 0.2 per cent of gross domestic product should also prop up the rupee in the interim.
Still, weak growth will probably prevent the rupee from any significant break higher. The economy grew just 4.6 per cent in the Jan-March quarter.
The US Federal Reserve's current track to end its economic stimulus before year-end will also hold it back. And the Reserve Bank of India has been intervening in the market daily, buying dollars to prevent sharp rises in the currency from strong foreign inflows.