Rupee to hold at 58-62 level, RBI to buy $40 bn by March 2016: BofA-ML

The rupee, notwithstanding the appreciation in the US dollar, is expected to trade in the 58-62 range supported by softening of global oil prices and curbs on gold imports, says a report by Bank of America Merrill Lynch.

The global brokerage firm further said that the Reserve Bank of India (RBI) would need to raise US $40 billion by March 2016, just to maintain import cover at the present eight months.

It said the factors that are supporting the domestic unit include softening of oil prices, the continuation of gold import curbs and rising Foreign Institutional Investor (FII) equity inflows.

"We expect the RBI to hold Rs 58-62/USD for now even though the US Dollar has strengthened below 1.30/Euro," BofA-ML said in a research note, adding that rising FII equity inflows at US $9.6 billion so far this fiscal has also led to a helping hand to the rupee.

The rupee on Monday recovered by 15 paise to 60.24 against the dollar in early trade on increased selling of the American unit by exporters and banks amid sustained foreign fund inflows.

"We continue to expect RBI Governor Raghuram Rajan to buy FX at Rs 58+/USD to guard against contagion," the report noted.

Rajan has also said that RBI is preparing for any rate hikes by the US Federal Reserve by building an adequate level of foreign exchange.

"Any emerging market today is going to look at the currency volatility and say 'whatever money comes in, I'm going to be careful about it, I'm going to build some reserves..." he had said in Chicago last week.

According to the BofA-ML report, restrictions on gold imports is expected to contain the current account deficit at 1.7 per cent of GDP in FY15.

The rupee would price-in the eventual liberalisation of gold imports and this in turn would push up the current account deficit to 2.4 per cent of GDP in FY16, especially if pent up demand leads to a jump in gold imports, it added.

According to BofA-ML gold price is expected to be at US $1375/oz in 2015.