Rupee hits another new low of 87.59 ahead of RBI's rate decision Friday

The rupee hit another closing low of 87.59 against the US dollar on Thursday ahead of the monetary policy committee’s (MPC) decision on interest rates, to be announced on Friday. Market participants said strong demand for the dollar was also due to the maturity of positions in the non-deliverable forwards (NDF) market.

 

The local currency had settled at 87.46 per dollar on Wednesday.

 

“The rupee depreciated today (Thursday) and yesterday (Wednesday) because there was an expectation of a rate cut,” said a dealer at a state-owned bank. “There was also some maturity of swaps in the NDF market,” he added.

 

 

At the end of November, the Reserve Bank of India (RBI) had a $59 billion short position in the forward market.

 

On the other hand, government bond yields remained steady at 6.65 per cent, unchanged from Wednesday, as the market has already factored in a rate cut. Bond market participants said yields might soften on Friday if the RBI delivers yet another reduction in banks’ cash reserve ratio (CRR) requirement.

 

Market participants said the RBI intervened in the foreign exchange market via dollar sales, albeit in small amounts.

 

“The RBI was there, but not much; they were there in the afternoon. The 88 level is the next stop if a rate cut happens tomorrow (Friday),” said a dealer at another state-owned bank.

 

Market participants said that in the NDF market, approximately $1 billion to $2 billion may have matured, with a short position of around $30 billion to $35 billion.

 

Meanwhile, the dollar index rose slightly to 108.03 on Thursday, from 107.60 on Wednesday. It measures the strength of the greenback against a basket of six major currencies.

 

Most Asian currencies also depreciated against the dollar, which weighed on the rupee, said dealers.

 

After declining 1.3 per cent against the dollar between April and November, the Indian unit fell 3.5 per cent since December, coinciding with Sanjay Malhotra taking charge as the 26th governor of the RBI.

 

A key concern was the RBI's stance on the rupee being overvalued, implying further depreciation. Market participants had expected the rupee to reach 87.50 by March-end, but it depreciated sooner than anticipated, reflecting heightened volatility.

 

The rupee breached the key 87 per dollar mark on Monday as the dollar strengthened after US President Trump imposed tariffs on Canada, Mexico, and China. The Indian unit fell to 87 per dollar from 86 per dollar in 15 trading sessions. The movement from 86 per dollar to 85 per dollar took 16 trading sessions. The rupee depreciated from 84 to 85 against the greenback in 46 working days, while moving from 83 to 84 took 478 days.

 

“Tomorrow’s policy will decide what level we are going to see next because 50 paisa depreciation in two days is too much volatility,” said the treasury head at a private bank.

 

The monetary policy committee is expected to cut the repo rate by 25 basis points (bps). The domestic rate-setting panel has kept its policy repo rate unchanged for the last 11 consecutive meetings after increasing it by 250 bps from May 2022 to February 2023. Since April 2023, it has held the repo rate steady at 6.5 per cent. This was done to keep a lid on inflation and bring it back to the medium-term target of 4 per cent.