Rupee seen at 61 against the dollar in near term

The sensitivity of Asian currencies, including the Indian rupee to the US dollar has "fallen" this year and the Indian rupee (INR) is expected to end the year at 61 despite a strong $, a Bank of America Merrill Lynch report says.

According to the global financial services major, the $/ INR is likely to end the year at 61 despite a strong $.

It has also revised its end-2015 forecast to 60 after factoring in a stronger balance of payments (BoP).

"The RBI's range of tolerance for $/INR and its intention to build reserves will be the single-biggest driver of the rupee over our forecast horizon, in our view," the report said.

A stronger $ is a clear downside risk for the INR but our estimates suggest the sensitivity to the DXY index has fallen, BofA-ML said in a research note, adding that $/INR can stay below 62.

The rupee today fell by 11 paise to 60.93 against the US dollar in early trade today at the Interbank Foreign Exchange market due to increased demand for the US currency from importers.

Meanwhile, RBI Governor Raghuram Rajan has also indicated that Rs 60-62/ $ was a reasonable range given underlying fundamentals.

The global brokerage firm further said that BoP would be INR-supportive.

"Our estimates place India's current account deficit at 1.7 per cent of GDP in FY15 and basic BoP deficit at roughly 1 per cent of GDP by FY16, consistent with a stronger level of the INR," the report noted.

In the quarter ended June, CAD, which indicates imports of goods services and transfer are higher than their exports, stood at $ 7.8 billion, or 1.7 per cent of GDP.

The BofA-ML report further noted that the Central bank would need to raise $ 40 billion just to maintain import cover at the present eight months. 

Image: A customer counts money outside a currency exchange shop in Kolkata.

Photograph: Rupak De Chowdhuri