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NOT SO FAST

The Indian rupee has hit another historic low after a surprise from the central bank

By Nupur Anand

India’s central bank was widely expected to increase the benchmark interest rate today (Oct. 05), the third straight hike this financial year. A rate increase would have helped curb inflation fuelled by the rupee’s weakness and surging crude prices.

Instead, the Reserve Bank of India (RBI) surprised the markets by keeping both the repo and reverse repo rates steady.

“This is a risky move by the RBI since the market was positioned for a rate hike, purely as a rupee defence. In its absence, currency and asset markets could see sharper corrections,” said Abheek Barua, chief economist, HDFC Bank.

The currency markets are seemingly disappointed by the move. Soon after the RBI governor Urijit Patel announced its quarterly monetary policy, the rupee breached the 74-per-dollar mark, its lowest ever. Steadily, it is inching towards the 75-per-dollar mark.

The RBI’s limited intervention had unnerved the currency market earlier, too. And this time has been no different. “There is no pointed talk on the currency, which is surprising. We can deduce that it will be driven by the market and the RBI is presently not considering any direct action,” said a report by Care Ratings.

Even though the central bank tried to calm the markets by saying that the rupee’s fall is moderate in comparison to emerging market peers, the markets seemed unimpressed on Friday. The rupee is the worst-performing currency in Asia and has already lost 14% of its value, since the start of this year. However, it is still better placed as compared to some of the other currencies in emerging markets such as the Turkish lira (down by over 40% this year), and the Argentine peso (down by over 50%).

Rising global crude oil prices, a widening current account deficit at home, and fears of international trade wars have spooked the currency market. Foreign investors have also pulled out $9.7 billion from the domestic market this year, which has further dragged down the currency.

Even the stock markets, which were hoping for a rate hike to offset the inflationary pressures from a falling rupee, disapproved of the RBI’s move.

There was a sudden sell-off after the announcement, which happened towards the fag end of trading hours on Friday; the benchmark BSE Sensex closed nearly 800 points lower, and Nifty lost over 300 points. The outlook for the stock and the currency markets doesn’t seem too bright either.

In the last few months crude oil prices have increased significantly and have already crossed $85 per barrel. This, coupled with a weaker rupee, has led to higher inflation. However, despite this, the inflation has been under control due to lower prices of fruits and vegetables. As a result, the RBI has revised downwards its inflation target for July-September to 4%, from 4.6% that it had projected two months ago.

The RBI has kept an inflation target of 4%, plus or minus 2%, and maintaining this range is its primary objective, said Urjit Patel, the central bank’s governor.

However, Patel has made one thing certain—the door still remains open to rate hikes. Therefore, it is still expected that the RBI may hike rates later this calendar year. So, all eyes will now be on the next meeting of the RBI’s Monetary Policy Committee scheduled for Dec 05.

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