Fed taper may create short-term rupee volatility: BofAML

Tags: News
The rupee is likely to see some volatility in short-term as US Fed's decision to wind down its easy money policy will tighten liquidity conditions in developed economies and also on account of India's low import cover, a top investment bank said today.

The Federal Reserve yesterday said it will reduce the pace of its monthly asset purchases to USD 75 billion from USD 85 billion.

"We expect the rupee to see some volatility in the short run if the markets panic about shrinking G-3 liquidity, given India's inadequate import cover of 7.5-8 months," Bank of America Merrill Lynch (BofAML) said in a report.

The Group of three (G-3) consists of the US, euro-zone and Japan.

The rupee slipped by five paise to close at 62.14 against the US dollar in the spot market today.

The report expected the Indian unit to trade in 60-65 range if the greenback trades around 1.30/euro. "Any sharp up move in the US dollar to, say, 1.20/euro levels, could see rupee testing 68 level against the greenback again."

BofAML said in 2014, the foreign exchange market will remain concerned about the maturity of forex swaps with oil companies which may come up in February-April.

The RBI opened the oil swap window on August 28 after the rupee fell to an all-time low of 68.82 against dollar. The window was open till the first week of December.

The window directly offered dollars to the three oil marketing companies (OMCs) for equivalent rupees which they have to return over a period of time.

RBI Governor Raghuram Rajan yesterday said OMCs owe USD 7 billion to the central bank. They had borrowed USD 12 billion through the oil window.

The forex market will be concerned by the political uncertainty during April-May general elections and also on eventual removal of gold import restrictions imposed to curb current account deficit this year, the report added.

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