The Reserve Bank of India's liquidity-tightening measures are likely to be rolled back by October as market sentiment and the Indian rupee trajectory are expected to improve, Barclays said.
Steps announced by new RBI Governor Raghuram Rajan could attract USD 10 billion of forex inflows in the next three months and this could be a material near-term positive for the rupee, which has lost 20 per cent since January, the London-based banking and financial services company said.
Rajan, who took over on Wednesday, announced steps auch as enhanced limits for exporters to re-book cancelled forward exchange contracts and a special concessional window to swap foreign currency non-resident deposits.
"As these fresh RBI measures are likely to raise the possibility of better forex inflows in the next three months, we see potential for a near-term improvement in market sentiment and the INR's trajectory," Barclays said in a research note.
The report added that such improvements may provide an opportune moment for the RBI to start unwinding its liquidity-tightening measures, "possibly in September-October, albeit gradually."
In July, the RBI increased both the marginal standing facility rate and the bank rate to 10.25 per cent. It restricted allocation of funds under the liquidity adjustment facility and raised cash reserve ratio norms.
Last month, the central bank imposed some curbs on outward remittances by resident Indians.
Barclays, however, acknowledges the risks from uncertainty in the global markets.
"We remain cognizant of the risks stemming from greater uncertainty in global financial markets in the near term (the upcoming FOMC meeting, Fed's new chairman selection, German elections and a spillover of geopolitical risks in the Middle East into energy prices)," it said.
The rupee today strengthened further by 20 paise to 65.81 against the dollar in early trade, largely supported by recent RBI measures. The domestic currency had gained 106 paise to close at 66.01 yesterday.