"We believe the time is right for RBI to start tapering its swaps with oil companies as the markets are already pricing these in," BofA-ML said in a report.
"It is scarcely possible to fund net oil imports averaging USD 8-10 billion a month with forex reserves of about USD 282 billion. Thus, it is imperative to arrest falling import cover that has halved to seven months, well below the 8-10 months critical for the rupee stability."
The RBI opened a forex swap window in August to meet the entire daily dollar requirements of three oil marketing companies as the rupee depreciated to an all-time low of 68.85 against the US currency. The rupee has since recovered and closed at 61.74 against the dollar on November 1.
"The rupee expectations have come off to 60-65 per dollar from 65-70 after the RBI finally began to take initiatives to recoup forex reserves by stepping up capital inflows and curbing gold imports," the report said.
The report said overseas investors may take a breather after equity inflows touched over USD 2.5 billion in October.
"After all equity markets are no longer cheap, with the one-year forward Sensex PE hitting almost 16 times, against the historical benchmark of about 14 times, as the Sensex crossed 21,200. So, waiting further (to close the oil swap window) may not improve the balance of payment position anymore," the report said.
Last month, the central bank said any tapering of the window, when it occurs, will be done in a calibrated manner.
The report said with expectations that the US Federal Reserve will start tapering its stimulus programme in January at a gradual pace of USD 10 billion and the dollar recovering to 1.34 against the euro, there may be no cross currency benefit in waiting longer to wind down the forex swap window.
RBI Governor Raghuram Rajan said last month he would consider the rupee to be stable only when dollar demand from oil companies returns to the market.
The BofA-ML report estimates that about USD 20 billion will be raised from bank borrowing swaps and a window to swap
forex deposits from non-resident Indians by the November 30 closing date. As of October 28, USD 12.1 billion had been mopped up.
The brokerage said if Indian gilts are included in the emerging market bond index, the RBI can raise an additional USD 20-25 billion from these benchmark funds.
The report also expects the money market to shift to repo mode by end-November, after the Diwali demand works itself out, with the RBI putting oil companies partially back on the forex market.
The RBI on October 29 calibrated the window between the repo rate (7.75 per cent) and marginal standing facility (8.75 per cent) to 100 basis points. Rajan had said that once there is adequate liquidity, the price of money will move down from the marginal standing facility rate to the repo very quickly.