RBI prefers Rupee at 62/$; won't let it depreciate beyond 65: BofA-ML

NEW DELHI: The Reserve Bank of India (RBI) is likely to hold the rupee in the 58-62/$ range with lower oil prices and gold import curbs offsetting US Dollar strength, says Bank of America Merrill Lynch (India). The bank continues to expect the RBI to recoup foreign exchange reserves to guard against contagion.

"Our call that the RBI will hold Rs 58-62/$ has held so far, although the stronger US Dollar may force a temporary breach," the bank says. In case the Rupee breaches 62/$, BofA-ML expects the RBI to mount a token defense, selling around $500 million-$1 billion.

"RBI would ideally want to hold Governor Raghuram Rajan's preferred 60-62/$ zone. At the same time, it will not spend too much of precious foreign exchange at a time the Rupee has outperformed most BRIC/TIM currencies," the bank feels.

The bank believes that RBI will be able to hold Rupee expectations beyond 62/$. Rajan will be able to anchor Rupee expectations if he takes the Foreign Exchange market into confidence, says BofA-ML.

Is there a risk of the rupee depreciating to levels beyond 65 versus the US dollar? Bofa-ML is of the opinion that Rajan will not allow that to happen and will step up an aggressive defence. "We expect the RBI to mount a full barrelled defense to anchor expectations, at 65/$, selling up to $20 billion, if need be."

"Given the low import cover, the Rupee has tended to fall below the previous low in each successive rounds of volatility. The Rupee dropped to 53/$ during the end-2011 European crisis. It fell further to 57/$ during the 2012 Greek crisis. The Rupee collapsed to 68/$ during the taper tantrum of 2013. Against this backdrop, Rajan will not want to take chances with Rupee expectations beyond 65/$," the bank explains.

BofA-ML adds that dollar strength should continue to be offset by falling oil prices and gold import restrictions. Given gold import curbs, the bank forecasts the current account deficit at a manageable 1.5% of GDP for the current fiscal at its house $100/bbl Brent forecast.