The global financial services major tweaked its rupee forecast as against the dollar for 2017-18 and 2018-19. It now expects the domestic currency to average 64.3 this fiscal and 65.4 in 2018-19, (as against previous estimates of 65.4 and 67.6 respectively).
"Based on global/local macro and analysis of India's external vulnerability, we expect the rupee to remain range-bound (62-66) over the next few months and average 64.3 in 2017-18 and 65.4 in 2018-19," UBS said in a research note.
The rupee has strengthened significantly this year. It has been among the better-performing currencies in emerging markets and has appreciated 5.9 per cent so far this calender year.
The factors that supported the strengthening of the rupee this year include strong FII debt flow, which touched $18 billion so far this year; a strong Assembly election result in Uttar Pradesh; ongoing reform momentum and external stability, the report said.
UBS, however, does not expect the rupee to breach 60 in the near term.
According to UBS forex strategist Rohit Arora, debt inflow is likely to become much slower as G-Sec limits are almost fully utilised, while equity flow is likely to be constrained by elevated growth expectations.
The most critical reform includes resolution of stressed assets in the banking system, GST progress and easing supply-side bottlenecks to help turn around the investment cycle, UBS said.
"While India remains vulnerable in its external position, the risks have reduced over the past five years (since the US tapering episode) on policy measures and creation of external buffers. That said, we believe India is not immune to global risk aversion," the report added.
The rupee is currently hovering around 64 against the US dollar.
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