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BofA pegs FY21 CAD at 0% on crude oil plunge

BofA said RBI raising the ceiling for FPI investment in government bonds can help raise forex cover.

PTI|
Last Updated: Mar 31, 2020, 10.11 PM IST
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On the CAD, the report has cut its FY21 forecast by 70 bps to 0 percent of GDP as it has also cut its crude price forecast by $12 a barrel to $35.5 for FY21.
Mumbai: Wall Street brokerage Bank of America Securities India on Tuesday projected a zero per cent current account deficit for FY21 as it sees crude prices falling further from the current levels.

The brokerage also said the Reserve Bank raising the ceilings for foreign portfolio investors in investing in government bonds by USD 30 billion can help its raise forex cover, which had the steepest fall in recent years plunging to close to USD 11.98 billion to USD 469.909 billion in the week to March 20.

This in turn open up the debt markets for the RBI to recoup the forex cover and thus defend the rupee which has been plunging to new lows in recent weeks, says the report, adding "RBI can sell USD 30 billion of forex to stabilise the rupee and at the same time augment the reserves to guard against contagion.

The RBI has opened fresh issuances of 5-, 10-, and 30-year G-secs to non-residents from FY21 (as announced in the budget) under a fully accessible route. This should be seen as a major step to enter the G-secs into global benchmark indices.

On the CAD, the report has cut its FY21 forecast by 70 bps to 0 percent of GDP as it has also cut its crude price forecast by USD 12 a barrel to USD 35.5 for FY21.

The brokerage also expects RBI to defend the rupee by shoring up the forex cover by incentivising exporters to bring back proceeds, raise the cost of import finance and hike rupee the FCNR deposit rates. They also see the rupee plunging to 76 a dollar by June.

The RBI has also raised the FPI investment limit in corporate debt limit by USD30 billion to 15 percent of stock after FPIs pulled out USD6.7 billion from debt raising the twin risks of fiscal slippage and depreciation.

In light of today's debt FPI flow liberalisation, we have retained FY21 FPI flows at USD 7billion in FY21 compared to an outflow of USD 6.5 billion in FY20. This takes our forex intervention of USD45bn, more than the durable liquidity requirement of USD 38 billion for FY21.

We expect the RBI to use the recent forex reserve accretion to fend off speculative attacks and says RBI can easily sell USD30 billion to stabilise the rupee

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