Rupee weakens after RBI rate cut; Guv says external position comfortable

The rupee slipped after the RBI cut the repo rate by 25 bps, with traders citing dollar sales near 90.07 per dollar. Governor Sanjay Malhotra said reserves and the external sector remain comfortable

The rupee gave up early gains after the Reserve Bank of India (RBI) delivered a 25 basis point (bps) rate cut on Friday.

 

The local currency was trading at 89.70 per dollar before the policy meeting decision was announced.

 

However, it settled at 89.99 per dollar, a slight change from the previous close of 89.98 per dollar.

 

“A more dovish and growth-oriented stance narrows India’s rate advantage, which could keep foreign inflows modest and leave the rupee somewhat exposed in the short term. However, the RBI has reiterated its commitment to maintaining orderly market conditions, suggesting continued intervention to manage volatility, even as it keeps domestic liquidity abundant,” said Abhishek Goenka, founder & chief executive officer (CEO), IFA Global. 

“Overall, this Monetary Policy Committee (MPC) clearly tilts towards supporting growth, enabled by low inflation. But it also means the rupee will remain sensitive to global risk sentiment, oil prices and capital flows,” he added.

 

Market participants said the RBI intervened in the foreign exchange market via dollar sales at 90.07 per dollar to avoid further depreciation.

 

RBI Governor Sanjay Malhotra said at the post policy press conference that India has adequate reserves, a manageable current account deficit (CAD) of around 1 per cent and is supported by strong fundamentals. It is expected to attract healthy capital inflows.

 

Overall, the country’s external sector position is very comfortable.

 

“We are in a very comfortable position in the external sector. I do not expect the CAD to rise to 2 per cent, or any such level. Overall, the external sector remains stable and comfortable,” he said.

 

India’s foreign exchange reserves stood at $686 billion as of November 28, providing an import cover of more than 11 months.

 

On the US trade deal, which has weighed on sentiment in the foreign exchange market, the governor noted that India is largely a domestic demand-driven economy. And, the impact of higher tariffs has already been incorporated into the RBI’s projections.

 

“Not a very high impact because ours is mostly a domestic demand. Certainly, a few sectors are being impacted by it. We are aware of those sectors and we have given out certain relief packages. The Government of India has also given out the relief package. I think this is an opportunity for us and the exporters have already started looking out for their productivity and diversifying, among other things. We should be able to come out of this stronger, going forward,” Malhotra said.