India's rupee hits new low as RBI holds rates

India's rupee hits new low as RBI holds rates

The rupee touched a life-time low of 73.41 against the U.S. dollar as crude prices jumped above $85 per barrel on expectations of tighter supply once the United States sanctions start targeting Iran's petroleum industry from next month.

The Reserve Bank of India (RBI) surprised the markets Friday by keeping its key policy rate - the repo rate - unchanged after two back-to-back hikes while indicating that it could raise interest rates down the line, a stance which led to a sell-off in stocks even as the rupee weakened further. It is also the rate at which banks borrow funds from the RBI to meet their short-term funding requirements. Authorities have moved to ring-fence Infrastructure Leasing & Financial Services, while the RBI has pledged to inject $5 billion into the system through bond purchases as it tries to ease the liquidity squeeze. The RBI doesn't have any target or band in mind and acts only to manage volatility. Reverse repo rates also stayed unchanged at 6.25%.

Additionally, fears over the Reserve Bank of India (RBI) turning more hawkish in its monetary policy stance due to a rise in inflationary pressure has subdued the prospects of rupee.

The dollar index, which measures its performance against a basket of six currencies, was 0.1 per cent higher on the day at 95.804.

Forty out of 49 economists surveyed by Bloomberg News had predicted a rise of 25 basis points.

The rupee recovered from intraday low of 74.23 after RBI Governor Urjit Patel reiterated that the domestic currency is still better than its emerging market peers and that the apex bank does not have a target for it. It further noted that inflation will clock 3.8 per cent in the third quarter of 2018-19 and 4.5 per cent in the next quarter of the current fiscal.

"Focus would now shift to the RBI monetary policy meeting".

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Five members of the MPC, including the Governor voted for status quo, while one voted for a 25 basis point hike in the repo rate.

The currency has plunged about 14% against the USA dollar this year on the back of higher U.S. interest rates.

Analysts said the rising oil prices are hampering growth and raising interest rates may be inevitable.

"First.Inflation in key food items such as pulses, edible oils, sugar, fruits and vegetables remains exceptionally soft at this juncture".

Both crude oil and rupee factors are expected to feed into higher inflation in the months leading up to the 2019 general election. "If crude prices continue to surge, then the RBI may have to come with front-loaded rate increases".

THe RBI said the inflation outlook is clouded with several uncertainties.

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