RBI Monetary Policy: Will this 3-day meet weigh on Indian Rupee?

Indian rupee has been hovering in the range of 66-67 level against US benchmark dollar index on Monday at interbank forex market. The rupee in early trade strengthened at one-month high by 21 paise to a fresh one-month high of 66.85 against the dollar, however minutes later, the domestic currency weakened by over 67-mark against the dollar. In such a situation, traders will be keeping an eye on the Reserve Bank of India (RBI) second bi-monthly policy meeting which begins from today. This would be the first time, when RBI has decided to schedule three days meet for Monetary Policy Committee (MPC) from June 04 to June 06. 

At around 1339 hours, the Indian rupee was trading at 67.085, down by 0.150 points or 0.22% against the US dollar. 

Last week, when GDP numbers were announced at 7.7% in Q4FY18 as against 7% in Q3FY18, Indian rupee took it in a positive note. 

On Friday, Indian rupee finished at 66.935 mark above 0.505 points or 0.75% against dollar. This would mean that rupee is at one month high, as the last time it witnessed near 66-mark was on May 3, 2018. In the same month, the domestic unit has been hovering at 16-month low of 67-68 level against the dollar. 

Anindy Banerjee, analysts at Kotak Institutional Equities, said, “We have stepped into a week where RBI is scheduled to announce its decision on key policy rates and guide on the monetary policy going forward. Inspite of RBI's hawkishness, it may be too early to hike rates now.”

In Banerjee’s view, RBI may like to wait sometime, to see how monsoon plays out and whether the economic momentum that picked up pace in the previous quarter continues to build or not. 

Retail inflation is still comfortably below 5.00%, at 4.58% in April.

Banerjee further explained that though CPI is expected to harden towards 5.5% by end of FY 19, due to rising commodity prices, hike in MSP and base effect but RBI still has room, where it can offer some more time to the economy to broaden its pace of recovery. 
 
“We expect RBI to maintain a hawkish stance, which is important as market needs to continue to believe that the central bank remains committed to keeping real rates in India above >+1.5%,” Banerjee added.
 
Currently, India’s repo rate stands at 6%. Consequently, the reverse repo rate under the LAF remains at 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25%.

On the RBI’s policy week and impact on rupee, Banerjee said, “Technically, USDINR is still in a corrective downtrend, currently trading at 66.90, after making low of 66.84 levels on spot. We have been playing short USD for the entire of last week, since 67.90 levels. USDINR still has room for downside, possibly towards 66.60/70 zone, the cluster zone during the first week, before its launch towards 68.50 levels.”

“We expect that region to hold and a near term bottoming may occur there. However, if the pair holds below 66.50, then we would play for a continuation of the downtrend, initially towards 66.00 levels on spot. Therefore, at current levels we just covered our shorts and waiting on side-lines,” said Banerjee. 

Moreover, on Monday, the benchmark Sensex indices was trading at 35,169.03 down by 58.23 points or 0.17%, however in early opening, the index was trading sharply higher by 328.33 points or 0.93% at 35,555.59. On the other hand, the Nifty 50 was below 30.15 points or 0.28% trading at 10,666.05.