American investment bank and leading brokerage house Goldman Sachs today said it sees the current rally in the rupee to continue with the currency closing the year at Rs 51 to the US dollar on account of improving CAD and recent reforms by the government.
It has pegged the current account deficit at 3.5% for the ongoing fiscal.
"We remain positive on the rupee due to an improving CAD (current account deficit) and greater capital inflows, in part due to the recent reform efforts by the government, as well as the global easing of liquidity. We maintain our 12-month rupee target at 51 to the dollar," Goldman said in a note today.
Stating that CAD had peaked last fiscal, it said, "We continue to maintain our earlier forecast that the CAD may have peaked in FY 12, and will likely trend down due to the sharp rupee fall. We expect the FY 13 CAD at 3.5% of GDP, down from 4.2% in FY 12."
The rupee has been gaining since July, after hitting a life-time low of 57.13 in mid-June.
Since the beginning of the year, the local currency has gained over 7%, but still it is down 18% from its pre-August 2011 highs.
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The rupee closed 2011 as the biggest loser among the BRIC currencies and still continues to be so.
The CAD, which is the difference between foreign currency earned and expended, touched a historic high of 4.3% of GDP for the full year in FY 12, while in Q2 of last fiscal it had touched a whopping 4.5% of GDP.
Describing the improvement in balance of payments situation in Q1 as on "expected lines", Goldman said while CAD in Q1 was higher than consensus expectations, it was an improvement over Q4, leading to a positive balance of payments (BoP).
"While the CAD still remains high, we continue to believe that it may have peaked in FY 12 and can continue to improve in FY 13," Goldman said.