Bank of America-Merrill Lynch has said the Reserve Bank of India (RBI) should start winding down its special forex swap window for oil marketing companies because market expectations on the rupee have improved and the fall in the country's import cover needs to be stopped.
The central bank had opened a forex swap window in August to meet the entire daily dollar requirements of the three oil marketing companies as the rupee depreciated to an all-time low of 68.85 against the US currency.
"The rupee expectations have come off to 60-65 per dollar from 65-70 after the RBI finally began to take initiatives
to recoup forex reserves by stepping up capital inflows and curbing gold imports," the financial services firm said.
The Indian currency has since recovered and closed at 61.74 against the dollar on November 1.
"We believe the time is right for RBI to start tapering its swaps with oil companies as the markets are already pricing these in," BofA-ML said in a report. "It is scarcely possible to fund net oil imports averaging $8-10 billion a month with forex reserves of about $282 billion. Thus, it is imperative to arrest falling import cover that has halved to seven months, well below the 8-10 months critical for the rupee stability."
The report said overseas investors may take a breather after equity inflows touched over $2.5 billion in October.
"After all equity markets are no longer cheap, with the one-year forward Sensex PE hitting almost 16 times, against the historical benchmark of about 14 times, as the Sensex crossed 21,200. So, waiting further (to close the oil swap window) may not improve the balance of payment position anymore," the report said.
Last month, RBI had said
any tapering of the window, when it occurs, will be done in a calibrated manner.