India's rupee to outperform rival yuan as economy gains strong momentum

India's rupee has been a cheerless investment this decade, plunging 38 percent over the past 5 years and far underperforming its Chinese rival which has added near 10 percent gain over the same period. However, with India's economy likely to outpace the Chinese one, the picture for the currencies may considerably change within some five years.

This is the opinion Nizam Idris sticks to, who is the head of currency and fixed-income strategy at Macquarie in Singapore said in an interview with CNBC.

"The main driver for the two currencies over the medium term will be the growth outlook, which drives capital flows," he said.

After years of trudging behind China, India's economy is now on track to overtake it as the world's fastest growing major economy.

According to data compiled by the World Bank, India's GDP is to expand 7.5 percent in 2015, 7.9 in 2016 and 8 percent in 2017.

By contrast, China's growth is expected to slow to 7.1 percent in 2015, 7.0 in 2016 and 6.9 a year after.

What is noticeable, in 2014 India's economy grew 7.3 percent, a touch below China's 7.4 percent expansion.

"The rupee's outperformance is predicated on India's ability to anchor inflation," Idris noted, adding that China has had a better track record at doing so.

Although inflation in India has significantly eased in the past year due to softer global commodity prices, a tight monetary stance and government efforts to contain food inflation, the country soon had to fight runaway prices.

Thus, Idris further noted that global investors need to make sure the country sticks to policies to keep inflation low while boosting growth.

If it happens this way, the rupee may strengthen 13.5 percent to hit 55 rupees against the U.S. dollar in 5 years. Over the same period, he expects the yuan to appreciate just 3 percent to 6 yuan against the dollar.

Growth in China is hampering which means that capital inflows will remain limited. Moreover, the government's intent to drive consumption "could cause the current account to deteriorate further," Idris said.

May be not?

There, however, analysts who hardly agree that the rupee will have its time in the sun in the latter half of the decade.

Senior foreign exchange strategist at ANZ Khoon Goh believes that the yuan is still more attractive to global investors given efforts by the government to liberalize its capital account.

"I think there's better potential for the yuan simply because the Chinese authorities are very focused on continuing to open up their capital account and making sure that foreign investors have easier access to onshore markets," Goh said.

In Goh's opinion, foreigners generally own just 2 percent of Chinese government bonds, which presents much scope for inflows in the future.

"In India, foreign institutional investor (FII) limits around Indian government bonds are close to exhaustion. The potential for further inflows really depends on whether policymakers increase limits," Goh said. "Those sorts of decisions happen on ad hoc basis in India – a contrast from China, where the policy path is very clear."

Goh predicts the dollar-yuan pair to settle at 6.15 and dollar-rupee at 65 in the next five years. And he is not sure whether India will be able to keep inflation in check over the medium-term.

"Typically, countries that run high inflation tend to see their currency depreciate over time to compensate for the loss of competitiveness resulting from high inflation rate," Goh said.