Rupee hits record low despite suspected central bank action

MUMBAI: The Indian rupee plumbed record lows as global oil prices rose and stocks and bonds weakened yesterday, heightening speculation that the central bank may hike interest rates today more aggressively than earlier expected.

A majority of analysts polled by Reuters last week expected a third consecutive 25 basis point increase in the key repo rate, currently set at 6.5%, though speculation has mounted in recent days that the Reserve Bank of India (RBI) could opt for a 50 bps hike.

“Expectations are building for an aggressive rate response, but the policy committee’s inflation mandate and the current benign trend, backs the case for a measured 25 bps rate hike,” Radhika Rao, an economist at DBS wrote in a note yesterday.

The partially convertible rupee hit a life low of 73.82 per dollar before recovering to 73.62/63 by 0710 GMT. It had closed at 73.335 on Wednesday.

One forex dealer at a foreign bank, who asked not to be named, said early intervention by the central bank stopped the rupee from hitting 74 per dollar, but it is still down 13.3% since the start of the year, making it the worst performer among Asia’s emerging market currencies.

The fall in the rupee also led to a sharp rise in government bond yields, due to increasing expectations that the RBI’s monetary policy committee (MPC) could go for a bigger rate increase than expected on Friday.

“Markets are in a panic right now, they are probably pricing in more rate hikes than what the MPC can deliver,” a senior debt trader at a private bank said. – Reuters