ECB liquidity drive to offset Fed tapering impact: BofA-ML

Foreign brokerage Bank of America-Merrill Lynch (BofA-ML) today said ECB's over $1 trillion injection will support investor inflows into the country and the Reserve Bank will use the same to recoup forex reserves.

The ECB announcement of monthly bond buying of euro 60 billion will help offset the impact caused by a likely tightening by the US Fed, the report said.

"We think ECB QE should support portfolio equity inflows to the Indian markets, despite the Fed tightening," it said in a note, adding the RBI will use this opportunity to up its forex kitty keeping in mind the impact which an event in Fed tightening may have.

"We continue to expect RBI Governor Raghuram Rajan to recoup forex to fight possible contagion when the Fed raises rates in September," it said, adding while doing so, the central bank will hold the dollar at 60-65 range.

The brokerage added that it expects the forex reserves to reach 10 months' import cover by March 2016, which currently is at about eight months.

It can be noted that there was heavy depletion in the reserves during RBI's fight to prevent a heavy depreciation in the rupee in 2013, after fears of a change in Fed's monetary stance.

The RBI has since recovered a lot of lost territory and the Forex reserves are over $322 billion for week ended January 16, which is its life-time high.

The brokerage said its equity analyst are expecting the benchmark Sensex to touch 33,000 points by December on the back of an expected fund flows of $25 billion into the country. The index touched a new life high of 29,279 points, gaining over 4 percent in the week.

In the note, the brokerage also said that the RBI may expand the $25 billion cap on FII's investments in government bonds by another $5 billion after the Budget.

"Despite strong demand for Indian g-secs, the RBI will likely continue to err on the side of caution until markets price in Fed rate hikes that we expect from September," it said.