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The Indian rupee is likely to appreciate to 81 against the U.S. dollar over the next 12 months amid expectations of heavy foreign capital inflows, Goldman Sachs said in a note on Tuesday.

Still, the currency will underperform its Asian peers as the Reserve Bank of India (RBI) could continue to accumulate inflows and build forex reserves "at every opportunity," economist Santanu Sengupta said.

Equity portfolio flows into India will be "robust" as the Federal Reserve starts its interest rate easing cycle in 2024, while debt inflows will be strong following India's inclusion in the JPMorgan's global bond indexes, Goldman Sachs added.

Moreover, Asia's third-largest economy will continue to benefit from regional supply chain diversification, which will boost foreign direct investments, it said.

The brokerage has a fairly bullish view on the rupee compared with other analysts.

The rupee will gain to 82.80 by end-November, according to a Reuters poll last month.

The Indian currency was trading at 83.3375 on Tuesday after shedding 0.5% of its value in 2023, which was its smallest annual percentage change in at least 20 years.

Goldman Sachs expects the rupee to hover around 82-83 per dollar over the next three-to-six months.

India's external balances remain favourable, with a combination of low current account deficit, strong public market capital flows, adequate forex reserves and low external debt, it added.

The country's foreign exchange reserves rose to a 21-month high of $620.44 billion as of Dec. 22.

The RBI intervenes in the currency markets to prevent excessive volatility in the rupee's exchange rate.

Goldman Sachs on Tuesday lowered its estimates for India's current account deficit in 2023 and 2024 to 1% of gross domestic product and 1.3% of GDP, from 1.3% and 1.9%, earlier.