MUMBAI (Reuters) – The Reserve Bank of India may allow the rupee to weaken slightly to ease a slightly elevated real effective exchange rate and keep the South Asian currency “competitive”, Bank of America Securities said in a note on Thursday.
This “supports the government’s ambitions to attract large-scale manufacturing investments,” the Wall Street firm said, adding that it expects the rupee to weaken to Rs 84 to the US dollar by the end of the year.
The rupee was at 83.7075 by 10:54 am IST, holding near its all-time low of 83.72 hit on Wednesday.
Bank of America noted that the currency’s trading range has eased slightly to 83.40-83.70 this month, from the 83.0-83.5 range it held for much of the first half of the year.
The Reserve Bank of India has managed to keep the rupee in a narrow range through two-pronged intervention — by absorbing inflows to boost foreign exchange reserves and, as it did this week, selling dollars to support the currency.
“We see no sign of a change in the RBI’s drive to increase its reserves, which would limit the potential for rupee appreciation,” Bank of America said.
The Reserve Bank of India’s dual intervention has been successful in keeping rupee volatility under control compared to its historical levels.
“Over the medium term, it would be prudent for the Reserve Bank of India to allow for higher volatility in the rupee. Coupled with a policy of building up large reserves, this could create more asymmetric risks to the rupee’s depreciation,” Bank of America said.