Published: Sun, October 07, 2018
Economy | By

Rupee Drops 44 Paise To Hit New low of 73.77 Against USD

Rupee Drops 44 Paise To Hit New low of 73.77 Against USD

The Indian rupee Friday crashed below the 74-level against the USA dollar for the first time ever after the Reserve Bank kept its key policy rate unchanged. Slumping below 74 to reach 74.23 for the first time in its history, the rupee recovered to finally settle at 73.76, 18 paisa below its previous closing of 73.58. In line with our expectations, the yield curve has relatively turned flattish, we expect fair value of 10 year G-sec at 8.4 per cent.

"The rupee has extended losses today as the RBI monetary policy meeting has clearly disappointed the street", Rushabh Maru, Research Analyst at Anand Rathi Shares and Stock Brokers said.

With a general election due by May next year, Prime Minister Narendra Modi's Hindu nationalist party will want to campaign on strong economic growth and success in containing inflation.

The Reserve Bank of India (RBI) said on Friday it has been trying to ensure the foreign exchange market remains liquid and is not targeting any particular level.

After its bi-monthly meeting, the MPC chose to keep the key repo rate unchanged at 6.25 per cent while changing its stance to caliberated tightening from neutral.

The GDP growth projection for 2018-19 is retained at 7.4 per cent as in the August resolution.

The rupiah was IDR= down 0.7 percent as of 0557 GMT and has weakened over 10 percent so far this year, making it the second biggest loser in the region after the Indian rupee INR=IN , which has continued to plumb new lows and forced the central bank to intervene. "There is no target or band around any particular level of exchange rate, which is determined by market forces demand and supply", the governor added. The sixth risk is the staggered impact of house rent allowance (HRA) revision by the state governments, which impacts overall inflation. A rate increase would have helped curb inflation fuelled by the rupee's weakness and surging crude prices, helping strengthen the economy.

The price of oil, which is highly negatively correlated to the strength of the Rupee, may be about to decline. The MPC voted 5:1 in favour of the status quo with only one member Chetan Ghate voting for a 25 basis points hike.

The decision by the RBI comes at a time when liquidity conditions have tightened and there are worries that defaults by a systemically-important financier could lead to a contagion.

A "neutral" stance allows the RBI to move either way on rates. This is the rate at which it lends money to domestic banks.

All of this has resulted in currency depreciations in emerging economies, which is an understatement as far as the rupee is concerned.

The lowering of inflation risks were exclusively based on food inflation momentum which according to RBI over weights increase in household expectations, higher input & selling prices, sharp increase in crude oil prices and currency depreciation by ~6%. HSBC in its fourth quarter Global Economics outlook said there is now a growing risk that crude could touch $100 per barrel.

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