MUMBAI (Reuters) – The Reserve Bank of India may allow the rupee to weaken slightly to offset a slightly elevated real effective exchange rate and keep the South Asian currency “competitive,” BofA Securities said in a note on Thursday.
“This supports the government’s ambition to attract investment in large-scale manufacturing,” the Wall Street firm said, adding that it expected the rupee to fall to 84 per US dollar by the end of the year.
At 10:54 a.m. Indian time, the rupee was trading at 83.7075, holding close to its all-time low of 83.72 hit on Wednesday.
The currency’s price range weakened slightly this month to 83.40-83.70 from the 83.0-83.5 level it held for most of the first half of the year, BofA said.
The RBI has been keeping the rupee in a tight range with bilateral intervention — absorbing inflows to boost foreign exchange reserves and also, as happened this week, selling dollars to support the currency.
“We see no signs of a change in the RBI’s drive to increase its reserve buffer, which would limit the upside potential for the Indian rupee,” BofA said.
The RBI’s bilateral intervention has helped keep rupee volatility in check relative to historical levels.
“Over the medium term, it would be prudent for the RBI to allow for more volatility in the INR. This, along with its policy of building a large reserve buffer, could create a more asymmetric risk to a trend depreciation of the INR,” BofA said.
