The rupee is forecast to appreciate slightly during the forecast period, from an average of Rs45.7:US$1 in 2010 to Rs42:US$1 in 2015. The rise in the currency's value 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, as it is forecast to average a moderate 1.7% 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% over the forecast period.
Although the rupee appreciated in nominal terms in 2010, it is 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 might trigger a sharp fall in the rupee's value and could wipe out the modest gains in nominal terms 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.