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)
Wall St set to open flat as investors digest Fed comments
Wall Street was set to open flat on Monday as investors pondered the timing of the next interest rate hike following comments from top Federal Reserve officials.
Dollar at 3-week high, bonds and stocks sell off on hawkish Fed
LONDON The dollar rose to a three-week high against the yen on Monday, while bond yields surged to their highest since June and stocks sold off after senior Federal Reserve officials indicated a U.S. interest rate increase was on the cards in the near term.
Gold hits near 5-week low after Fed strikes hawkish note
LONDON Gold slid to a near five-week low on Monday after comments from top Federal Reserve officials fuelled speculation that U.S. interest rates would rise sooner rather than later, weighing on the dollar.