RBI may allow slightly weaker rupee on elevated REER, says BoFA
This story was originally published at 20:17 IST on 25 July 2024
Register to read our real-time news.Informist, Thursday, Jul 25, 2024
NEW DELHI – The Reserve Bank of India may allow the rupee to depreciate gradually to unwind the elevated real effective exchange rate level, Bank of America Global Research said in a report. Bank of America also raised its dollar/rupee forecast for 2024-end to 84 rupees a dollar from 83 rupees earlier.
The rupee's real effective exchange rate against a basket of 40 currencies, based on trade weights, rose to 106.54 in June, the highest level since December 2017. A rise in a currency's REER is an indication that the exports are becoming expensive and the country is losing trade competitiveness.
"A gradual and limited depreciation may keep INR (Indian rupee) competitive on real terms and also support the government’s ambitions for attracting large-scale manufacturing investments," the report said.
Foreign portfolio inflows have been strong and may continue with the inclusion of Indian government bonds in JP Morgan's emerging market bond index, but the central bank has continued to build up its foreign exchange reserves and absorbed the inflows, the report said. JP Morgan included Indian government bonds in its Government Bond Index – Emerging Markets suite over 10 months starting Jun 28. India's gilts would hold up to 10% weightage on the Global Diversified variant of the index. The process will be completed by Mar 31, 2025, with a 1% increase in weight every month.
"We see no sign of change in RBI’s pursuit of higher reserves buffer which would limit the appreciation potential for INR (Indian rupee)," it said. India's foreign exchange reserves hit an all-time high of $666.85 bln as of Jul 12.
Over the medium term, it would also be prudent for the RBI to allow higher volatility in the Indian rupee, along with the policy of building a large reserves buffer, that could create more asymmetric risks for trend rupee depreciation, the report said. Volatility in the dollar/rupee has slumped due to the RBI's active two-sided intervention in the currency market.
For Indian government bonds, the room for a rally was limited until easier monetary policy later this year proved to be a catalyst. Until then, returns from bonds may be lacklustre due to the lack of premium priced in from medium-term fiscal uncertainty, a flat yield curve and investors already positioned for bond index inflows, the report said. End
US$1 = 83.70 rupees
Reported by Pratiksha
Edited by Saji George Titus
For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.
Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.
Informist Media Tel +91 (11) 4220-1000
Send comments to feedback@informistmedia.com
© Informist Media Pvt. Ltd. 2024. All rights reserved.
To read more please subscribe
Share this Story:
