The Reserve Bank of India (RBI) is expected to buy forex reserves at every opportunity to combat global contagion, a Bank of America Merrill Lynch report said.
The report said the rupee is expected to reach Rs 66.75/USD level by December.
According to BofAML, the RBI has bought about $16 billion in the spot market since April.
"We continue to expect the RBI to recoup forex reserves to combat global contagion. The import cover looks comfortable at about 11 months on 1-year forward basis, well above the 8 months we deem required for INR stability," Bank of America Merrill Lynch (BofAML) said in a research note.
One of the key factors that require the RBI to recoup forex include moderation in capital flows on account of rich equity valuations.
Moreover, FPI G-sec limits are almost exhausted.
"The BSE Sensex is trading at 1-year forward P/E of 20x far higher than the average of 16x," BofAML said adding that its equity strategists see BSE Sensex at 30000 by December.
Other reasons cited by the report include, moderation in global liquidity with the Federal Open Market Committee (FOMC) likely to cut down quantitative easing (QE) and foreign investors may favour China over India in bear markets, especially given rising index weights.
BofAML further said that 'imported' inflation risks are coming off on a weaker US Dollar and low oil prices and "BJP will likely continue to be INR conservative in the run up to the 2019 polls".
The Asia forex strategists at the global financial services major expect Rs 66.75/USD by December.
The rupee is currently hovering around Rs 64 against the US dollar.
