Rupee at New Record Low: Will India's Central Bank Save the Currency?

Rupee plunges to fresh record low of 73.77 against dollar

On Wednesday, the currency hit a record low of 73.42 against the U.S. dollar.

"Despite a stronger dollar, crude oil prices continued to remain very elevated, which is putting further pressure on current-account deficit currencies that rely on oil imports, India and Indonesia specifically", said ANZ's Goh.

In forex market, the rupee breached the crucial 74 level to trade at 74.07, down 49 paise. At 2.34pm, the home currency was trading at 74.09 a dollar, down 0.61% from its Thursday's close of 73.58. The BSE Sensex too plunged by 584.53 points, or 1.66 per cent, to 34,584.63 in late afternoon trade. RBI is widely expected to raise the rate at which it lends to banks (called repo rate in banking parlance) on Friday in a bid to slow the rupee's decline and rein in inflationary pressures.

The monetary policy committee probably decided against the rate hike for two reasons. Rising crude oil prices have wreaked havoc on India's economy because it's one of the world's largest importers. The currency pared some losses to touch a high of 72.90 per dollar on market speculation that RBI may open special dollar window for oil companies.

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. "Despite Government's plan to cut borrowing in H2FY19, yields continued to increase due to rate hike expectation from RBI".

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The rupee logged a weekly loss of 1.8%.

The 10-year benchmark bond yield fell to 8.05 percent from 8.13 percent before the policy was announced, as traders expecting a rate hike were caught wrong-footed.

Abheek Barua, Chief Economist of HDFC Bank commented on the RBI Policy calling it "a risky move" since the market was positioned for a rate hike, purely as a rupee defence.

The Asian currency positioning poll is focused on what analysts and fund managers believe are the current market positions in nine Asian emerging market currencies: the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit and the Thai baht.

The data in August showed 210,000 jobs created while unemployment was at 3.8%. However, given rupee depreciation and expected inflationary pressures, at least one rate hike by the RBI this year can not be ruled out, he said. "Should there be a fiscal slippage at centre or states, it will have a bearing on the inflation outlook, besides heightening market volatility and crowding out private investment", the RBI governor said.

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