A rate cut by the Reserve Bank is likely to help the rupee, which today hit a record low of 57.54 versus dollar, says a Bank of America Merrill Lynch (BofA-ML) report.
Keeping rates high will only defer recovery, deter FII equity inflows and delay re-accumulation of foreign exchange (FX) reserves, it said.
"Keeping rates high - on the ground of defending INR, at least - will likely only further defer recovery, deter FII equity inflows, delay re-accumulation of FX reserves and depreciate the INR," the report said.
In contrast, lower rates can spur hopes of recovery, attract FII equity inflows, especially given the current correction, and provide the RBI an opportunity to recoup FX, it added.
The rupee today plunged by 48 paise to hit its life-time low of 57.54 in early trade on heavy dollar demand and the American currency gaining overseas on better-than-expected US jobs report.
The Indian currency crossed its previous all-time closing low of 57.32 touched in June-end last year.
"We are not surprised that the INR has again been among the worst hit of BRIC and TIM currencies in this round of volatility," the report said, adding that the rupee is likely to continue to trade weak till the RBI is able to recoup the $60 billion of forex (including forwards) sold since 2008.
"We continue to expect the RBI to try to hold Rs 52-56/USD if the US Dollar trades in a 1.30-1.20/euro band," DSP Merrill Lynch (India) India Economist Indranil Sen Gupta said in a report.
The report further added that if the US dollar settles about 1.30/euro, we would expect the RBI to ease next Monday (June 17) with the April industrial growth likely to be anaemic at 1.5 per cent and May WPI inflation benign at 5 per cent.
