Rupee plunges to fresh record low of 73.77 against dollar

Rupee plunges to fresh record low of 73.77 against dollar

Rupee plunges to fresh record low of 73.77 against dollar

The fact that higher interest rates will compound the liquidity problem was a setback for the consensus view on the RBI policy.

Consequently, the reverse repo - the rate at which the Reserve Bank borrows money from commercial banks within the country - stood unchanged at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent. The 10-year yield fell 13 basis points to 8.03 percent.

The domestic currency closed at a record low of 73.34, down by 43 paise or 0.59 per cent on Wednesday. Subsequently, the RBI raised the repo rate or short term lending rate by another 25 basis points in August policy meet.

The Monetary Policy Committee, headed by RBI Governor Urjit Patel, announced the decision after a three-day meeting.

"Inflation is projected at 4 per cent in second quarter (July-September) 2018-19, 3.9-4.5 per cent in H2 (October-March) and 4.8 per cent in Q1:2019-20 (April-June), with risks somewhat to the upside", it added. However, given rupee depreciation and expected inflationary pressures, at least one rate hike by the RBI this year can not be ruled out, he said.

Economists had expected the Reserve Bank of India (RBI) to hike its key rate as Asia's third-largest economy grapples with a plummeting currency and soaring oil prices.

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The 30-share Bombay Stock Exchange Sensex fell sharply, with investors anxious that the fall in the rupee and increase in crude-oil prices would further widen the trade deficit.

In anticipation of a rate hike, banks like SBI and HDFC increased borrowing rates while fund managers increased their cash holdings.

However, the Central Bank seems to have taken the broader economic and liquidity scenario into account, he said. "Should there be a fiscal slippage at centre or states, it will have a bearing on the inflation outlook, besides heightening market volatility and crowding out private investment", the RBI governor said.

The resolution said actual inflation outcomes have been "below projections" as the expected seasonal increase in food prices did not materialise and inflation, excluding food and fuel, moderated. It has fallen almost 15 per cent so far in 2018, the worst performer among its other Asian peers. At the same time, prices of crude oil - India's biggest import - rose more than 10 per cent, a factor that is likely to drive headline inflation in coming months.

"Rupee was caught off guard and weakened beyond 74, after RBI surprised markets by keeping rates unchanged".

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