MUMBAI (Reuters) – The Reserve Bank of India may allow the rupee to weaken slightly to soften the slightly elevated real effective exchange rate and keep the South Asian currency “competitive”, BofA Securities said in a note on Thursday.
“It supports the government’s ambitions to attract large-scale manufacturing investments,” the Wall Street firm said, adding that it expects the rupee to fall to 84 per dollar by year-end.
The rupee was trading at 83.7075 as of 10:54 AM IST, remaining close to its all-time low of 83.72 on Wednesday.
The currency’s trading range has weakened slightly this month to 83.40-83.70, from the 83.0-83.5 range it held for much of the first half of the year, BofA said.
The RBI has kept the rupee within a narrow range through a two-way intervention: absorbing inflows to boost foreign exchange reserves and, as it did this week, selling dollars to support the currency.
“We see no sign of change in the RBI’s push for a higher reserve buffer, which would limit the appreciation potential for INR,” BofA said.
The RBI’s two-way intervention has kept the rupee’s volatility in check compared to historical levels.
“In the medium term, it would be prudent for the RBI to allow higher volatility in the INR. Together with the policy of building a large reserve buffer, that could create more asymmetric risks to the trend depreciation of the INR,” BofA said .
