The Reserve Bank of India is expected to raise $30-35 billion through NRI bonds to support the rupee and offset the slowdown in FPI flows amid rising oil prices, according to a report.
Foreign portfolio inflows into India will be impacted by Chinese firms listing in global benchmark indicies like MSCI, Bank of America Merrill Lynch said in a report. The listing in benchmark indices will shift up to $100 billion to China market by 2019, the report added.
Our China strategists estimate that possible entry into benchmark indices could push up to $100 billion into the China markets by end-2019.BofAML
It further said that FPI equity flows to India may slow amid political uncertainty in the run up to the general elections, given rich valuations.
"We grow more confident that the RBI will issue a fourth tranche of NRI bonds to raise, say, $30-35 billion, to offset slowdown in FPI flows on listing of China paper in various benchmark indices at a time of higher oil prices," the report noted.
NRI bonds are forex deposits raised from non-resident Indians at attractive rates for 3-5 years, with some lock-in and an implicit RBI guarantee.
As per the report, RBI will issue NRI bonds if the global oil prices persist at $70/bbl.
BofAML oil strategists forecast $71.8/bbl for 2018-19 and $75.3/bbl for 2019-20 and accordingly the current account deficit will widen to 2.4 percent of GDP this fiscal from 0.7 percent in 2016-17, it noted.
"We think that there is a rising case for issuing NRI bonds. Every NRI bond issuance has been effective in curbing rupee volatility," the report noted.
The report further noted that the RBI is expected to follow an asymmetrical policy of buying forex when the dollar weakens and defending Rs 66 to the dollar when it strengthens.
On the rupee, which has been falling against the U.S. dollar, BofAML said its strategists see the Indian currency at Rs 69.75 to the dollar by December. The rupee is currently hovering around Rs 67 against the dollar.