Turmoil in markets as RBI holds rates, signals tightening

Kenny Grant
October 7, 2018

A likely intervention by the country's central bank along with expectations of some short-term measures in the upcoming monetray policy to curb currency fluctuations aided the Indian rupee to recover on Thursday from its new record low of 73.82 to a United States dollar. Rising global crude oil prices, a widening current account deficit at home, and fears of worldwide trade wars have spooked the currency market, leading to several currencies underperforming versus the dollar.

Coming back to the Indian Rupee Exchange Rate, the recent downfall in the rupee is being attributed to the RBI's decision to keep its lending rates unchanged.

The rupee Wednesday weakened further to 73.25 against the USA dollar while brent crude was trading near USD 85 per barrel. The benchmark hit a low of 34,202.22, before finishing 792.17 points, or 2.25 per cent down at 34,376.99.

Since the MPC's mandate is to target inflation, there is a possibility that we may be seeing another rate hike - the third in a row.

Consistent dollar demand from importers following higher crude oil prices, kept the rupee under pressure. "Also, the rupee has depreciated to its all-time low to 74 against the dollar should attract NRI property buyers".

Mumbai: The Reserve Bank of India is widely expected to increase its repurchase rate by 25 basis points (bps) when it unveils the monetary policy on Friday, as it seeks to curb the potential inflationary impact from rising crude oil prices and a weakening currency.

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"The inflation outlook calls for a close vigil over the next few months, especially because the output gap has virtually closed and several upside risks persist", the RBI said. While a 25 basis points hike in repo rate is a given, the market may be keenly awaiting other measures by the RBI to shore up rupee.

The rupee has fallen more than 14 percent since January, making it the worst performing major Asian emerging market currency.

'Markets are in a panic right now, they are probably pricing in more rate hikes than what the MPC can deliver, ' a senior debt trader at a private bank said.

A section of banks have a day before the RBI announcement, hiked interest rates.

And to help spur the domestic economy, Garg said the RBI is likely to ramp up liquidity injections through open market operations (OMO).

"The rupee has extended losses today as the RBI monetary policy meeting has clearly disappointed the street", Rushabh Maru, Research Analyst at Anand Rathi Shares and Stock Brokers said.

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