Rupee hits new low of 73.34

Daniel Fowler
October 7, 2018

The rupee's plunge to a new record low of 73.77 against the dollar by falling 44 paise in early trade, too, weighed on investor mood.

The Indian rupee plunged to a fresh record low of over 74 to a USA dollar on Friday late afternoon, after the Reserve Bank of India (RBI) maintained its key benchmark lending rates.

In line with our expectations, RBI maintained the key policy repo rates at 6.5%.

The MPC projects inflation at 3.9-4.5 percent in H2 of FY19 and 4.8 percent in Q1 of FY20.

"The RBI voting for a pause indicates that there is an attempt on its part to address the domestic macroeconomic fundamentals to tackle headwinds in the global market". The MPC retained the repo rate at 6.50%, thus ending the week-long speculation, at least until the next policy announcement due in two months.

A guard stands next to the Reserve Bank of India (RBI) logo outside its headquarters in Mumbai, October 5, 2018. "RBI does not appear to be inclined to lift rates just to protect (the Indian rupee) unless there is clear evidence that a weaker currency has pushed up imported inflation".

The country's GDP growth is expected to go past 7 percent this year, but the downside to raising rates may be a slowdown in economic growth.

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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.

The rupee is the worst performing emerging market currency having lost nearly 14 percent since January this year.

"And if one looks at establishing macro stability, then by having independent-focussed MPC on inflation control, the RBI has taken the right step".

Unveiling the bi-monthly monetary policy, the central bank warned that volatile and rising oil prices and tightening of global financial conditions pose substantial risks to growth and inflation.

However, a likely intervention by the country's central bank aided the Indian rupee to recover before closing at 73.34 (73.3450) to the U.S. dollar.

"Given the sell-off in the domestic equities and higher crude oil prices, the rupee is now expected to move towards 75-76 levels in next couple of sessions", said Rushabh Maru - Research Analyst, Anand Rathi Shares and Stock Brokers. The RBI had hiked Repo rates twice since April this year - 25 basis points in the June policy and another 25 bps in the August policy. Despite the rise in oil prices, the headline inflation number came down to 3.69 per cent for August as against 4.17 per cent for July.

"With this stance we have two options, we can either increase rates or hold them", he said.

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