RBI to continue increasing forex reserves cover: BofA-ML

The Reserve Bank will continue to buy dollars to shore up the foreign exchange reserves to further buttress the nation's import cover, says a report.

The forex reserves touched $320.564 billion in the week to July 25, a tad below the all-time high of $321 billion in September 2011.

"We expect Governor Raghuram Rajan to continue to recoup forex to guard against contagion. After all, the RBI needs to raise $80 billion to maintain the current not-very-adequate import cover of 8 months by March 2016," Bank of America- Merrill Lynch said in a report.

In May and June, the central bank had bought $28.3 billion of forex forwards.

According to the report, this fully covers RBI's short outstanding forwards position including the $26 billion of FCNR-B swaps.

"On balance, we continue to expect the RBI to hold the rupee at 58-62 level if the dollar persists at 1.30 per euro," the report said.

The Amercian brokerage said it expects the government and the RBI to introduce another bulk forex scheme to further increase foreign exchange reserves.

It said the government could hike investment limit in government securities by another $5 billion to $30 billion, replacing the $5 billion reserved for sovereign wealth funds and others, within the overall FII debt investment limit of $81 billion to increase reserves.

Another option is to list government securities in an emerging market bond index to raise $20-25 billion from benchmark funds that track that index.

The report said the government could also issue sovereign bonds or quasi sovereigns to raise $5-8 billion, in the manner of Brazil and Russia, taking advantage of the Modi government's strong political mandate, to shore up the reserves.