Bank of America-Merrill Lynch (BofA-ML) says a less dovish US Federal Reserve is good for India. The report comes after Fed officials are increasingly concerned about the potential risks of the US central bank's asset purchases on financial markets.
India would benefit should the Fed turn less dovish by lowering ‘imported’ inflation, reducing prices of oil and hence, helping narrow the current account and fiscal deficits, and sustain capital inflows by reducing macro risks.
A move towards ending quantitative easing would ultimately help the Reserve Bank of India recoup forex reserves sold and shore up import cover, which stands at seven months, BofA-ML says.
The bank expects the rupee to trade weak until RBI recoups forex reserves at a time of wide current account deficit.
RBI should buy FX at 52/dollar levels, if the dollar settles at 1.30/euro to recoup $65 billion reserves sold since 2008, says a note.
RBI will likely continue to defend 56/dollar levels, if the dollar rises towards 1.20/euro, it says.
