The rupee is expected to be around 66 per US dollar by the year end because of rising current account deficit and muted FPI equity inflows amid rich valuations in domestic stock markets, says a report.
According to Bank of America Merrill Lynch (BofAML), the Reserve Bank is expected to follow an "asymmetrical" policy response to the US dollar, wherein it will allow some depreciation in the rupee and will recoup forex reserves at every opportunity that the greenback depreciates.
"The RBI will likely continue to follow an asymmetrical forex policy of recouping forex reserves when the US dollar is depreciating and allowing Rs 65-66/USD when it appreciates," BofAML said in a research note.
The global financial services major further said that "we see a tug of war between the USD and the RBI's compulsion to recoup forex reserves in the coming year", and added that its forecast for December 2017 is Rs 66/USD and Rs 64 for December 2018.
"We see USD strength pushing the INR up to Rs 66/USD by December 2017, given a rising current account deficit (to 1.6 per cent of GDP from 0.7 per cent last year) at a time of rich valuations constrain FPI equity inflows," the report said.
In contrast, in 2018, USD weakness is likely to push the INR to Rs 64/USD by December 2018, it added.
The rupee is currently trading at Rs 64.78 against the US dollar.
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