Rupee will oscillate between "mild appreciation in good times and sharp depreciation in bad times" unless the twin deficits are addressed through a return to investment-led growth and reduced inflation, says Deutsche Bank.
The bank expects the rupee to appreciate mildly towards 52-53 in 2013.
Deutsche says there may be "considerable" volatility in its forecast, with the rupee gaining if capital flows see more momentum, or if reforms or the economy surprises positively.
However, the rupee could see weakness should there be a jump in commodity prices, or if flows lose steam on the back of weak exports and strong imports, Deutsche says.
The bank adds RBI must look at re-building its FX reserves if inflows remain strong as the economy would benefit from a stable exchange rate.
(Reporting by Swati Bhat)
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