A clear mandate at the Centre in the ongoing general elections may help the rupee rally to 57-58 level "temporarily", says a report.
"If May 16 (election results day) throws up a 'market-friendly' stable coalition government, we do not rule out the rupee temporarily breaching the 57-58 levels," Bank of America Merrill Lynch said in a report today.
However, the report does not see the rupee rallying to 55 as it has typically been far less sensitive to polls than equities.
Attributing lower import cover for not helping the rupee rise to 55, the report said, "the RBI will buy dollars if the emergence of a stable government attracts capital inflows."
However, it added that with the US Fed tapering on, it is difficult that capital inflows can be much larger.
The report further said it does not think fundamentals will sustain the rupee beyond 60-65.
"We expect the RBI to recoup forex reserves if a stable coalition attracts large-scale capital inflows. After all, the import cover, at 7.5-8 months, is well below the 10 months needed for a stable rupee," the report said.
The report believes the government will, sooner or later, have to remove restrictions on gold imports.
It expects the current account deficit to widen to 2.7 per cent of GDP in FY'15 from 1.9 per cent in FY'14.
The report said the next government's policies related to foreign exchange will be the next major trigger for the domestic currency.
"We expect it to allow the RBI to recoup forex reserves to ensure a Jalan-Reddy-type RBI bringing in external stability.
After all, most political regimes have followed a conservative policy of building up forex reserves, if necessary, at the cost of the rupee," it concluded.
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