The sensitivity of Asian currencies, including the rupee to the US dollar has "fallen" in 2014 and the domestic currency is expected to end the year at 61 despite a strong dollar, a Bank of America Merrill Lynch report says.
According to the global financial services major, the rupee is likely to end the year at 61 despite a strong dollar. It has also revised its end-2015 forecast to 60 after factoring in a stronger balance of payments (BoP).
"The RBI's (Reserve Bank of India) range of tolerance for USD/INR and its intention to build reserves will be the single-biggest driver of the rupee over our forecast horizon, in our view," the report said.
A stronger US dollar is a clear downside risk for the domestic unit but our estimates suggest the sensitivity to the DXY index has fallen, BofA-ML said in a research note, adding that USD/INR can stay below 62.
The rupee on Tuesday depreciated by 12 paise to close at one-week low of 60.94 against the American currency at the Interbank Foreign Exchange (Forex) market due to increased month-end dollar demand from importers and steep fall in the domestic equity market..
Meanwhile, RBI Governor Raghuram Rajan has also indicated that exchange rate of Rs 60-62 a dollar was a reasonable range given underlying fundamentals.
The global brokerage firm further said that BoP would be rupee-supportive.
"Our estimates place India's current account deficit at 1.7 per cent of GDP in FY15 and basic BoP deficit at roughly 1 per cent of gross domestic product (GDP) by FY16, consistent with a stronger level of the INR," the report noted.
In the quarter ended June, CAD, which indicates imports of goods services and transfer are higher than their exports, stood at US $7.8 billion, or 1.7 per cent of GDP.
The BofA-ML report further noted that the Central bank would need to raise US $40 billion just to maintain import cover at the present eight months.