Bank of America Merrill Lynch (BofA-ML) expects USD/INR to maintain a 58-62 range but believe there will be opportunities to accumulate carry despite the risks from a stronger USD. BofA-ML analysis suggest positioning is less extreme, hedging activity is INR-supportive and carry remains extremely attractive, particularly for short EUR/INR.
"We expect USD/INR to end the year at 61 (previously 60) despite a strong USD, and revise our end-2015 forecast to 60 (from 64) to factor in a stronger balance of payments (BoP) outlook," BofA-ML said. "The RBI will likely maintain its Rs 58-62/USD range of tolerance for USD/INR until it is able to build up sufficient FX reserves close to 10 months' import cover which looks unlikely over our forecast horizon. We estimate that it will need to buy USD 35-40 billion to maintain 8-month import cover in March 2016," it added.
It further said, we are bullish USD but our current forecasts for the DXY dollar index and estimated sensitivity of the Rupee suggests USD/INR can stay below 62. However, the RBI will not fight a much stronger USD if it is perceived to appreciate another 8-10% from current levels. This could result in a temporary breach of 62.
"A low FY15 current account deficit of 1.7% of GDP thanks to lower oil prices and gold import curbs, along with sufficient capital inflows will help anchor INR expectations as we move to a stronger USD regime. As gold import restrictions are removed, the current account deficit will eventually worsen to 2.3% of GDP in FY16 but the basic BoP should remain consistent with a slightly stronger INR."
"Inflation has peaked, and along with more credible RBI monetary policy, will encourage portfolio inflows, allowing the RBI to cut rates and reduce the need for nominal INR depreciation. Our analysis suggests that long INR positioning is less extreme, hedging activity is INR-supportive and carry remains extremely attractive, particularly for short EUR/INR. Our technical analysis also suggests EUR/INR is a far better expression of bullish Rupee views than USD/INR," it added.
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