Based on a recent report from Standard Chartered, INR pessimism appears overdone. There are number of reasons supporting this view. Indeed, the economic backdrop is not as weak as in H1-2012 ? the key differences being the fall in WPI inflation towards the upper bound of the Reserve Bank of India?s (RBI) 4-6% comfort zone, some resolution of Indian policy paralysis, the initiation of fiscal consolidation and reduced sovereign-downgrade risks.

Other reasons for optimism include the finance minister?s focus on attracting foreign investment to bridge the current account gap. The finance minister has also pushed back sovereign-downgrade risks by delivering on the promised fiscal consolidation. In fact, a lot has been achieved on reforms outside of the budget historically. Indeed, the finance minister has hinted that further reforms outside of the budget are likely.

We can expect more inflows into the rupee due to simpler rules on capital market access that will accelerate investment. The relaxation will definitely make investors from low-yield regions look at the Indian market.

The resolution of India?s multi-year policy paralysis in H2-2012 and the finance minister?s investor road show at the start of the year triggered c.USD 40bn of inflows to Indian markets between September 2012 and February 2013.

The second leg of the finance minister?s road show (April-May) may help turn the tide in India?s favour again, especially if accompanied by monetary easing and policy reforms (the Finance Minister was in Japan recently, where the next ?Ganges? will start flowing).

Standard Chartered expects a capital account surplus of USD 90bn on a combination of strong foreign investment and robust debt inflows. This, in turn, is likely to push the overall balance of payments (BoP) to a modest surplus of USD 2.7bn in FY14.

A more durable improvement in global risk appetite is positive for high-yielding currencies like the INR. RBI?s 36-country Real Effective Exchange Rate (REER) is still below the neutral level of 100, and valuations remain supportive of medium-term INR gains.