India stands to lose against China; but this is how RBI may rescue it

The Reserve Bank of India (RBI) is expected to raise $30-35 billion through NRI bonds at a time when rupee is under pressure against dollar, FPI inflows are slowing down and global oil prices are rising.

"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," said global brokerage Bofa-ML in a note. 

"Our China strategists estimate that possible entry into benchmark indices could push up to $100 billion into the China markets by end-2019. This cannot but slowdown FPI equity flows into India markets given rising valuations and political uncertainty," it added. 

BofA continues to see the RBI following an asymmetrical policy of buying forex (FX) when the dollar weakens and defending Rs 66 vs dollar when it strengthens. 

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 USD 75.3/bbl for 2019-20 and accordingly the current account deficit will widen to 2.4 per cent of GDP this fiscal from 0.7 per cent in 2016-17, it noted.

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"We think that there is a rising case for issuing NRI bonds. Every NRI bond issuance has been effective in curbing INR volatility," the report noted.

The report further noted that the RBI is expected to follow an asymmetrical policy of buying forex when the USD weakens and defending Rs66/USD when it strengthens.

On the rupee, which has been falling against the US dollar, BofAML said its strategists see the Indian currency at Rs 69.75 against dollar by December. 

The rupee is currently hovering around Rs 67 per dollar.