The currency had settled at 96.35/$ on Tuesday (October 6).
The rupee is now down around 8% so far this year, making it the weakest-performing Asian currency, amid pressure from a stronger dollar, elevated crude oil prices and foreign fund outflows.
The weakness came even as the Reserve Bank of India (RBI) raised the repo rate by 25 basis points to 5.50% on Wednesday (October 6), its first rate hike since February 2023. The Monetary Policy Committee also shifted its stance to ‘calibrated tightening’ from ‘neutral’, signalling a more hawkish policy approach.
RBI Governor on rupee valuation
RBI Governor Sanjay Malhotra said financial markets can be irrational in the short term, while several measures of the rupee’s value suggest that the currency may be undervalued.
“It’s only in the long run, they are able to find the right value,” Malhotra said at the post-policy press conference.
He added that by several estimates, including the real effective exchange rate (REER), the rupee is “not overvalued” and may be undervalued.
What is weighing on the rupee
The dollar index, which measures the greenback against six major currencies, was trading 0.25% higher at 102.09, adding pressure on emerging-market currencies.
Brent crude, India’s key import commodity, was also trading 0.97% higher at $101.56 a barrel. Higher crude prices can put pressure on India’s import bill and the rupee by increasing demand for dollars.
Foreign portfolio investors also remained sellers, offloading ₹2,961.30 crore of Indian equities on a net basis on Tuesday, according to exchange data.
RBI rate hike and rupee outlook
DBS Bank Senior Economist and Executive Director Radhika Rao said the RBI’s rate hike reflected rising cyclical inflation risks, while the change in stance and upward revisions to growth and inflation forecasts pointed to a hawkish policy approach.
According to Rao, the policy shift could be “modestly constructive” for the rupee as wider interest-rate differentials and the tightening bias may improve its resilience to external shocks, although a stronger US dollar remains a headwind.
The rupee’s move on Wednesday therefore comes despite the RBI’s tighter policy stance, with global factors such as the dollar, crude prices and foreign flows continuing to influence the currency.
-With agencies inputs