Rupee stability hinges on rise in forex reserves: BoA-ML

The rupee is expected to trade in the 58-62 range against the dollar in the near-term and would stabilise only if India's foreign exchange reserves improve, foreign brokerage Bank of America Merrill Lynch said on Friday. "We expect the rupee to hold 58-62 to the dollar," Bank of America Merrill Lynch (BoA-ML) said.

As foreign funds have been sellers in the domestic debt and equities market since May 22, the country's foreign exchange reserves have come down to cover imports for just seven months. FIIs have reportedly pulled out Rs 65,000 crore from the domestic market since then.

The Indian unit closed at 60.88 on Thursday. The rupee fell to an all-time low of 61.80 against the dollar during intra-day trade on August 6 and closed the day at 61.30.

The currency has fallen 12 per cent against the US unit so far this financial year.

"We continue to believe that the rupee will not stabilise until the Reserve Bank recoups the foreign exchange reserves, as the rate differential with the US Fed has already widened to 700 basis points," the report said.

BoA-ML expected the Government and RBI to announce some policy measures next week to augment the forex reserves. "A mix of the ECB liberalisation, FCNRB deposit rates hike and PSU bond issuances could fetch USD 5-10 billion." According to the report, last month's RBI measures to curb volatility in foreign exchange market and support the rupee has not really been able to stabilise the unit so far.

On July 15, the RBI had raised short-term borrowing rates and limited banks' access to liquidity by way of restricting borrowing from repo window to Rs 75,000 crore.

On July 23, it directed banks to draw only 50 per cent of their total deposits in overnight borrowings and maintain a 99 per cent average cash reserve ratio on a daily basis. The economic growth will be hit in this fiscal if RBI's liquidity tightening measures are not reversed soon, BoA-ML said.

"FY14 growth will slip to 4.8 per cent if RBI tightening is not rolled back before the October-March busy season." However, BoA-ML expected Asia's third largest economy to grow at 5.4 per cent in FY14 if a rollback happens and expand at 6.3 per cent next fiscal.