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MUMBAI (Reuters) - Elevated commodity prices could widen India's current account deficit, keeping the rupee under pressure until more sustainable capital flows can fill the gap, BofA Securities said in a note on Wednesday.
"India has continued to post wide trade deficits due to higher prices of oil and other commodities, which have eroded INR's basic balance buffer," the research house said.
Higher oil price and other commodity prices "are materially impacting" the fundamental outlook for rupee amid increased risks of populist measures, it said.
Multiple measures from the Indian government and the Reserve Bank of India (RBI) to reduce demand for the dollar and improve supply to the tune of over $40 billion across spot and forwards, will likely stabilize rupee briefly, it said
Sustained support from RBI would be needed to maintain a gradual pace of rupee depreciation.
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"The support could be in the form of further intervention or tightening of monetary conditions for longer term external rebalancing."
Risk-reward on rupee remains skewed for further depreciation, BofA said, recommending hedging long rupee exposure despite the high costs.
(Reporting by Nimesh Vora)
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