In order to arrest rupee depreciation, the Reserve Bank of India has a capacity to sell up to $30 billion from the forex reserves and may go for an NRI bond issue to mop-up up to $20 billion, foreign brokerage Bank of America Merill Lynch said on Monday.
"We expect the RBI to eventually mobilise $20 billion via NRI bonds, a la 1998 Resurgent India Bonds and 2001 India Millennium Deposits, as the sell-off of emerging market debt should constrain the ability of FII debt limit hikes to raise forex reserves," it said, adding that the central bank can sell upto $30 billion to support the rupee.
The BofAML report said that five year money can be raised by issuing the 7 to 9% coupon bonds to stabilise markets, just as it was done in 1998 and 2001.
The country's banks had raised $4.8 billion and $5.5 billion from the bonds targeted at the diaspora during the economic crisis years in 1998 and 2001, respectively.
BofAML said it expects RBI to defend the Rs. 60 to a dollar level. The rupee opened 40 paise down against the dollar on Monday and was trading at Rs. 59.74 to the dollar at 2:37pm.
Every round of volatility in the rupee (the current one has been on for over three weeks now) causes a dent of up to $15 billion to the forex reserves, and considering where the reserves stand right now, RBI can sell up to $30 billion, the report said.
The selling will get the country's import cover down to six months from the current seven months, the BofAML said.
Its strategists expect the rupee to peak at Rs. 59 to a dollar, according to the report.
RBI will start buying rupee once markets stabilise and the inflows from Unilver buy back, which would be in the region between $3 billion and $5 billion, happen, it said.
Raising the rates is not the answer to arrest the fall in rupee, it said, noting that the differential between the $Federal Reserve's lending rate and the RBI's is already at a peak of 7%.