After rallying to its highest level in more than two years the rupee is probably near its peak, and is expected to close 2010 marginally below current levels, a Reuters poll of 42 economists showed. But analysts expect a lot of volatility between now and then as record foreign capital inflows ahead of large upcoming share sales and a widening trade deficit pull the rupee in opposite directions.
The partly convertible Indian currency rose to a 25-month high of 44.1250 per dollar on Thursday. It rose 4.7 percent in September while on the year it is up 5.5 percent.
Foreign funds have bought a record $20.9 billion of Indian shares so far this year, more than a quarter of that since the start of September. Debt investments stand at $10.3 billion so far in 2010, compared with just $1.05 billion in 2009.
"India's widening current account deficit will not allow its currency to appreciate in a consistent fashion despite a good amount of portfolio inflows," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.
India's August trade deficit widened to a 23-month high while the current account widened sharply to $13.7 billion in the April-June quarter from $4.5 billion in the year-ago quarter. Nitsure said a possible surge in risk aversion among global investors could lead to a sharp depreciation in the rupee. The rupee is seen about 1.4 percent weaker than current levels at the end of December, according to the median estimate in the poll, but it is expected to regain some of its strength and rise to 44 at the end of September 2011.