RBI will continue to purchase when the rupee trades at 58-60 against the US dollar, said the Bank of America-Merrill Lynch report.
BofA-ML India chief economist Indranil Sen Gupta said RBI will recoup forex when the rupee is around 58-60/USD.
He noted that shoring up the forex cover is needed as the import cover has halved to about eight months, a level not seen since 2008. And for the RBI to maintain this level of forex cover it has to accrue USD 14.5 billion annually.
Quoting the just-released SDDS data from the IMF which showed the RBI bought USD 19.1 billion of short-term forwards in May, Gupta said: "We grow more confident of our call that Governor Raghuram Rajan will recoup forex to build the 'bullet-proof national balance sheet' he had talked of earlier".
According to the IMF's SDDS data, RBI bought USD 19.1 billion of short-term forwards in May reaping the advantage of improved investor confidence after the Modi win.
This brought down the net outstanding forward forex sales to USD 11.4 billion from USD 32 billion at end April. The bulk of these short-term long forward positions will mature in the second half of the current fiscal.
As per the latest RBI data, the forex reserves rose USD 1.385 billion to USD 314.92 billon, close its record high of USD 320 billion in September 2011. MORE PTI BEN ARS SA RYS 07011859
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The final data on the forex accretion will be visible on banks' nostro balances which will be released by RBI next week. Nostro Accounts are held by domestic banks in foreign countries in their currencies. They facilitate settlement of foreign exchange and trade transactions.
According to BofA-ML's BoP estimate, the RBI should be able to "buy USD 33 billion (inclusive of maturity of forex forwards with oil companies) this fiscal. This assumes that this fiscal gets USD 25 billion in portfolio inflows.
"On balance, we expect it to hold rupee at 58-62 to the dollar with the USD settling in 1.30 to the euro, he said.
When Bimal Jalan was the governor in NDA's last regime, the RBI has had doubled import cover to almost 15 months. The Modi regime has returned to office at an 8-month import cover, the same as 1998.
Gupta said: "In our view, the road to stable appreciation lies through higher forex reserves that strengthen investor confidence. The forex market has already rewarded Rajan's efforts to raise forex reserves with a stable rupee.
"As the RBI continues to rebuild forex reserves over the next two-three years, the rupee will turn course towards appreciation."
He also said the Modi government should be able to raise USD 5-8 billion through a sovereign bond issue to accumulate long-term forex and if the government bonds are listed on EM bond index it could mop up USD 25 billion from benchmark debt funds from a position of relative strength.