The Indian rupee could touch 70 to the US dollar in a month's time, although some revival of the currency is expected by the end of the year, Deutsche Bank said in a research note today.
Indian rupee dropped by 8 paise to 63.33 against the US dollar in the late morning trade today. The currency had hit a fresh intra-day low of 64.13 against the USD yesterday.
"Fundamentally the Indian rupee is undervalued and has overshot its equilibrium level substantially," the German banking major said adding "under a scenario of deep pessimism, currencies can overshoot substantially and remain so for a long time. India, we fear, is entering such a zone."
"We now believe that the Indian rupee could touch 70 to the US dollar in a month or so, although we expect some revival of the currency by the end of the year as the reality of taper turns out to be less disruptive down the road than it is now, and the current account deficit (CAD) continues to decline," Deutsche Bank said.
Meanwhile, the government has taken a slew of measures in recent months to prevent this vicious cycle, and though some of these measures like enhanced provision for FDI are likely to serve India well in the long term, but a number of measures have also suggested "haphazard decision-making," it said.
The research note further added that episodes of currency crisis also cause a range of negative spillovers, the most crucial of which is the health of the financial sector as rupee depreciation and rising cost of financing will put Indian borrowers under further stress.
According to Deutsche Bank, considering such risks (pushing up bad loans sharply, damaging the balance sheet of corporations and banks), "ratings agencies may be nudged toward a downgrade, although conditions have to be weak for another quarter or two before that were to transpire."
To prevent the crisis from deepening, Indian authorities need to gear up for recapitalising banks and supporting corporate refinancing, it said.
"Given the weak state of the fiscal position, this may entail a major rethink of the expenditure programme (especially plan spending), accelerated sales of state-owned assets, and a major external bond issuance with a credible set of macro-fiscal-structural policies underlying the programme," the report added.