RBI may sell US$20 billion to defend rupee at 69/USD, FPIs may react on 2019 election uncertainty: BofAML

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Updated: July 24, 2018 5:04:13 PM

The RBI (Reserve Bank of India) may sell 20 billion worth of US dollars to defend rupee at 69 per unit US dollar, if FPIs don't revive, BofAML said in a report.

In the FY19 so far, India’s financial markets have witnessed volatile activity due to the trade war, rising crude oil prices, FPI sell-off, rupee depreciation. (Image: Reuters)

The current year 2018 has emerged as relatively negative for India’s stock and foreign exchange markets due to a bunch of global uncertainties and regional disruptions caused by bank frauds and implementation of LTCG on equities. In the first three months of FY19, FPIs (Foreign Portfolio Investors) have pulled out as much as $3 billion from domestic equities while the Indian rupee has fallen to its all-time low. The RBI (Reserve Bank of India) may sell 20 billion worth of US dollars to defend rupee at 69 per unit US dollar, if FPIs don’t revive, BofAML said in a report.

“We expect the RBI to defend Rs 69/USD for now. If FPI flows do not revive, we would expect it to sell US$20 billion (US$12+ billion so far) in FY19 to fund our 2.4% of GDP current account deficit forecast. If INR crosses Rs 70/USD, we expect the MoF/RBI would trigger NRI bonds, potentially raising US$30-35 billion,” Bank of America Merrill Lynch said in a research report.

Foreign inflows in domestic markets have been highly sceptical with respect to the political situation in India. As seen in past, the benchmark Sensex has faced a couple of knee-jerk reactions while the outcomes of state elections (Gujarat, Karnataka) were being announced. “FPI equity flows may also react in the event of a Sino-US trade war, given rich valuations and political uncertainty in the run-up to the 2019 general elections,” BofAML said further.

Earlier last week only, the Indian rupee touched a fresh all-time low of 69.1263 against the US dollar. In the FY19 so far, India’s financial markets have witnessed volatile activity following the US-China trade war, boiling crude oil prices, negative Asian cues, FPI sell-off, depreciation of rupee vs US dollar, etc. Though the trade war is directly between US and China, experts suggest the implications are likely to disturb Indian markets too.

Due to the ongoing trade war spat, Chinese central bank has been continuously devaluing yuan. China’s yuan is hovering at a one-year low against US dollar. BofAML has said, the yuan devaluation won’t “materially” affect RBI’s foreign exchange policy, “given the limited direct linkage between the Chinese and Indian economies”. The direct impact of RMB devaluation on RBI FX policy is fairly low, said BofAML. “India’s exports to China, at 4.4% of total exports, are among the smaller of Asian countries. China’s exports to India are barely 3.7% of China’s total exports and 0.7% of China’s GDP,” BofAML noted in a report.

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