Rupee in free fall ahead of RBI policy announcement; how cbank may affect Indian currency

The start of today’s trading session was not in favour of Indian currency as it opened in a free fall and depreciated by 5 paise to 68.59 against the US dollar ahead of RBI’s third bi-monthly monetary policy announcement this fiscal year. RBI governor Urjit Patel along with six-member MPC have been meeting for past two continuous day for presenting the outcome of India’s monetary policy today. So far today, the rupee has touched an intraday high of 68.628 against the US benchmark dollar index.

At around 12:46 hours, the Indian rupee was trading at 68.603 above 0.114 points or 0.17% against US dollar.

According to a PTI report, major currencies were mostly weak against the dollar overseas after reports that US President Donald Trump would propose tariffs of 25 per cent, instead of 10 per cent, in an announcement that may come as early as today.

HDFC Securities said, “Crude and Rupee both were struggling at the time of last policy decision. That was proactively taken into the decision. But now these seem to have stabilized. We don’t think this would be a concern to the Central Bank.”

Anindya Banerjee analysts at Kotak Institutional Equities said, “Indian Rupee and bond traders will be reacting to RBI policy decision scheduled post noon. Expectations are for a no change in policy rates. However, INR swaps are still pricing at least one more rate hike this financial year. The central bank has guided for CPI to average around 4.7% for the second half of FY19, primarily due to favourable base effect.”

Kotak explains that, during H2 FY18, due to hike in HRA and also implementation of GST, inflation rose. Over the last one month, oil prices have stopped rising and even Rupee has appreciated by 1% from its all-time lows. Monsoon progress has been uneven but impact on food inflation is muted. Risk of higher MSP pushing up food inflation has not yet materialised.

Therefore, Banerjee says, “If CPI is expected to remain below 5%, and RBI is targeting a real rate of more than 150 bps, then a repo of 6.50% appears likely, which means one more hike of 25 bps. Having said that, there is no rush to hike rates now, RBI has the room to delay the hike to next meeting in October.”

In case, RBI hikes by 25 bps, Banerjee says, “Indian 10 year yields have harden towards 6.85% and Rupee may strengthen due to favourable real rate differential.

However, if history is any guide, impact of RBI monetary policy on Rupee is generally transitory.”
While if  RBI does not hikes rates and sounds a hawkish tone, then Banerjee says, “we can expect a sell-off in Indian bond prices and probable weakness in the Rupee.”

Technically, USDINR is in a limbo, stuck between 68.25/30 and 69.00/69.10 on spot.