The rupee is forecast to appreciate slightly during the forecast period, from an estimated average of Rs45.7:US$1 in 2010 to Rs42:US$1 in 2015. The currency's strengthening will be driven primarily by strong inflows of foreign investment, attracted by India's bright economic prospects. The current-account deficit is not expected to pose a threat to the rupee, given that it is forecast to average a moderate 1.9% of GDP during the forecast period. Given India's high estimated average rate of inflation in 2010 and the fairly rapid rate of price increases forecast for 2011-15, the rupee's nominal strengthening will represent a substantial appreciation in real terms, amounting to nearly 30% in the period.
Although the rupee is currently under upward pressure, it is also vulnerable to a number of downside risks. It will continue to be exposed to the inherent volatility of portfolio investment inflows. A bout of the jitters on the part of foreign investors could trigger a sharp fall in the rupee's value and could easily wipe out the modest gains that the currency is expected to make in 2011-15. The rupee could also be susceptible to downward pressure on its value if inflation runs out of control or the government fails to enforce greater fiscal discipline.