BofA Merrill Lynch expects rupee to stabilise at around Rs 60/$

International brokerage firm believes CAD numbers to fall by 0.6-0.8% on back of lower gold imports

Bank of America Merrill Lynch expects the vulnerable currency to stabilise around Rs 60 to the dollar on the back of lower trade deficit numbers.

In a report titled 'The calm after the storm’, the international brokerage firm believes that the current account deficit (CAD) numbers to fall by 0.6-0.8% on the back of lower gold imports.

“While the currency will be vulnerable till the high CAD/low reserves scenario reverses, we think near term the currency will be stable in a 2-3% range around Rs60/$. This will be driven by a 0.6-0.8% reduction in CAD led by 20-30% cut in gold imports (our economist expects 20%),” said a BofA Merrill Lynch report authored by Jyotivardhan Jaipuria and Anand Kumar.

On the equity market front, the brokerage firm expects to see a 5% rise on interest rate cuts in mid-November during the assemble elections. Based on this assumption, the firm believes that investors could look at buying at current levels.
But for those investors who are waiting for a dip in the market, the right buying time would be when the Sensex reaches levels of 19,000 – 19,300.

As an aside, the report noted that despite the 11% rupee depreciation over the past 10 weeks, the market had held its range and was up 3% in INR outperforming the emerging markets, both in local currency and dollar terms.

Inflationary pressures are likely to ease off on the back of normal monsoon, the report stated. “The monsoons so far have been normal and could help ease food inflation. This could drive CPI down from the current 9.9% to below 7% by October. The WPI should be in the 5-6% range in spite of increased administered prices as well as the rupee depreciation,” said the report.

Interest rate-cuts, which has so far been evaded by the central bank due to the rupee-volatility, could be brought back on the table, the report said. While this is unlikely in the RBI policy review to be announced on July 30, the report expects it to be cut by 50-75 basis points.

“Slowing growth and falling CPI will help the RBI cut rates in the last quarter of the year and we continue to expect a 50-75 bps rate cut this fiscal,” the report said.

According to the report the upside to the market could be capped by the government’s populist measures in the wake of the mid-November assembly elections and lower growth. “We continue to expect GDP growth as well as earnings growth to be vulnerable to downgrades. With assembly elections in Nov, 2013 reforms will continue to include a mix of populist measures,” said the report.

The fiscal deficit reduction is likely to be hurt by the sluggish economy, rupee depreciation increasing the subsidy on oil/fertilizers and populist measures like the Food Security Bill, the report noted.

The earnings growth for the fiscal has also been downgraded to a growth of around 8% from a consensus expectation of 12.5%.