The positive policy mix-with the RBI's pro-growth stance complementing the government's fiscal consolidation efforts-is likely to underpin the positive turn in investor sentiment towards India since late 2012. However, the key question is whether foreign inflows will be enough to plug India's large external financing gap.
Portfolio inflows to Indian markets totalled USD 14 billion between Sept and Dec, 2012, up 11.2% y/y, but this fell significantly short of the USD 76.5 billion trade deficit over the same period. While the government has stepped up its efforts to curb the trade deficit, primarily by increasing import duties, the impact of these measures is unlikely to be felt immediately, according to Standard Chartered Bank.
''Thus, the fundamental backdrop remains mixed for the Indian rupee (INR). As such, we expect USD-INR to remain rangebound but volatile until there are discernible signs of a sustained improvement in India's balance of payments,'' the bank said.
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