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Foreign brokerage Bank of America Merill Lynch (BofA-ML) today said the Reserve Bank's defences to save the rupee are very limited and the domestic currency can depreciate to 65 to the dollar, if the country does not go in for an NRI or sovereign bond issue.
"Unless the RBI raises NRI or sovereign bonds, the rupee will likely breach the 65 level in 2014, as it can at most sell $30 billion in defence," BofA-ML said in a note.
The note comes in the backdrop of intense speculation over the government and Reserve Bank opting to raise money from either NRIs or through a sovereign bond issue.
The rupee has depreciated by over 10% this fiscal. The depreciation was intense ever since the May 22 announcement by the US Federal Reserve that it may consider a withdrawal of its liquidity injecting stimulus programme, which led to a sell-off by investors.
Since May 22, the FIIs have sold debt worth over Rs 51,200 crore, which is one of the main reasons for the battered rupee.
The country had over $280 billion in forex reserves as of July 12, but they have fallen to cover only seven months of our imports, as against the threshold of 8-10 months which is necessary for stability, the note said.
Shoring up the foreign exchange reserves is the only option before the Reserve Bank, the note said, suggesting that it may look at hiking FII debt limits, more liberalisation on the foreign direct investment front and raising the FII equity limits in banks.
"We expect the RBI to finally take more proactive steps to recoup FX reserves," it said.
The report said the peaking of the current account deficit, which climbed up to 4.8% of GDP in FY'13 and has been one of the negative factors for the currency, is a good news in the current atmosphere, but added that the gap still remaining high for comfort puts pressure on forex reserves accumulation.
On the likely impact of the general elections on the measures, the report said the rupee is "actually agnostic to politics".
