India keeps policy rate unchanged in surprise move, rupee tumbles

India keeps policy rate unchanged in surprise move, rupee tumbles

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.

The rupee depreciation is due to overall strengthening of the USA dollar against local currencies, widening of trade and current account deficits due to higher crude prices, portfolio outflows and risk aversion among portfolio investors, it said.

The rupee slipped to a fresh record low 73.76 per USA dollar in early trade on Thursday, after settling at a record low of 73.34 on Wednesday.

Mumbai: The rupee on Wednesday plunged by 43 paise to breach the historic low of 73 level as soaring crude oil prices fuelled worries over capital outflows and widening current account deficit. Subsequently, the RBI raised the repo rate or short term lending rate by another 25 basis points in August policy meet.

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.

"Dollar-Rupee was once again saved by an alleged intervention from RBI".

Unemployment rate hits record low
Figures from the Department of Labor also showed the USA economy created 134,000 jobs during the month, fewer than were expected. The dollar .DXY was little changed against a basket of currencies, while stocks on Wall Street were trading lower.

"The Reserve Bank of India's MPC was expected to hike rates in its latest monetary review, given the impact of petroleum prices as also rupee value in the global currency market".

An increase in the price of oil to $96 a barrel could stoke inflation by 40 basis points above its estimate and damp growth by 30 basis points, the central bank said.

Prakash Sakpal, Asian Economist at ING, holds the view that by keeping the policy on hold, the central bank of India seems to have dumped the rupee and pushed the ball in the government's court for more substantial currency stabilisation measures.

Investment-wise, provisional data with exchanges showed that foreign institutional investors sold stocks worth Rs 1,550.04 crore on Wednesday. The finance minister said on Tuesday that the economy was adjusting "quite well" to higher USA interest rates and the fall of the rupiah, asserting that many of its economic indicators were good.

The rupee for the first time fell to a rate of 74-per-U.S. dollar, down 15 percent on the year, while the Reserve Bank of India again left interest rates alone. "Despite Government's plan to cut borrowing in H2FY19, yields continued to increase due to rate hike expectation from RBI".

In the Monetary Policy Report, the RBI said headline inflation will accelerate to 4.5 per cent by March 2019 quarter with upside risks.

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