Reserve Bank could turn to NRI bonds to stifle the crude blow: Report

To cushion the impact of rising crude prices that are set to increase further on the forex reserves, the Reserve Bank could go in for NRI bonds to the tune of USD 30-35 billion which will help it maintain the import cover at a comfortable level, says a report.

In a report, analysts at Wall Street brokerage Bank of America Merrill Lynch today revised upwards their Brent forecast to USD 71.8 a barrel from the earlier USD 62.5 forecast for FY19, and to USD 75.3 from USD 60 a barrel for the fiscal year 2020.

"The Reserve Bank should raise NRI bonds of USD 30-35 billion as higher oil prices will bring down the import cover to 9.6 months in FY19," the research report said.

The proposed NRI bonds, if issued, will be the fourth tranche, and can be used to recoup forex reserves and defuse the rupee impact from higher oil prices.

It also revised upwards its current account deficit (CAD) forecast to 2.4 per cent of GDP in FY19 from 1.9 per cent in FY18.

With foreign portfolio inflows likely to shift away with CAD hitting the optimal level of 2.4 per cent in FY19, the brokerage has cut its FY19 FPI inflow by USD 7 billion.

"This should erode import cover to 9.6 months this fiscal and to 8.6 months in FY20, taking it much closer to the eight months we deem needed for the rupee stability, which was seen last in the mid-2013 following the taper tantrum," the report said.

The government can cushion inflation from higher oil prices by cutting the excise duty if needed, it added.

"We raise our fiscal deficit forecast to 3.6 per cent of GDP from 3.5 per cent earlier for FY19, higher than the 3.3 per cent target, with our new USD 72 a barrel forecast for crude. This will raise cooking gas subsidy burden to Rs 400 billion from the budgeted Rs 250 billion in FY19.

The brokerage also revised its inflation forecast for FY19 to 4.7 per cent from 4.6 per cent, reflecting its crude price forecast.

On the policy rates, it sees a rate cut in August if the monsoon rainfall is normal.