The rupee may reverse a part of its recent weakness after the Reserve Bank of India's decision to provide foreign exchange to oil companies, J P Morgan Chase said in a note on Monday.
On Friday, the Reserve Bank of India said it would conduct open market operations in the secondary market in oil bonds held by state-run companies to provide liquidity to oil refiners.
"This announcement highlights policymakers' concern about the market impact of elevated foreign currency demand from oil importers," Vikas Agarwal and Siddharth Mathur wrote in a statement.
The potential size of the open market operations is significant and would provide oil refiners with around half their average daily foreign currency requirement, they wrote.
They estimate the central bank could provide as much as $12 billion of foreign exchange to oil companies under this facility.
If energy prices remain around current elevated levels, India's net oil imports could rise to almost $100 billion this financial year from around $55 billion last year, they said.
"As the pickup in demand from oil companies was an important pillar of bearish INR views, we expect that this new facility could have a substantial market impact," the statement said. They, however, maintain a bearish outlook on the rupee in 2008 as due to its weakness over the past several weeks, the balance of payments is likely to continue to remain under pressure.