Published: Sun, October 07, 2018
Money | By Armando Alvarado

India's rupee hits new record low as RBI holds rates

India's rupee hits new record low as RBI holds rates

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

However, we also find it hard to believe that the central bank will turn a blind eye to the currency problem.

The MPC (Monetary Policy Committee) statement of keeping the rates unchanged has come as a pleasant surprise to everyone since there was a consequent hike during the last two meetings.

Consistent dollar demand from importers, mainly oil refiners, following higher crude oil prices, kept the rupee under pressure.

Meanwhile, RBI Governor Urjit Patel Friday 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.

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THE BSE benchmark Sensex plunged over 550 points on Wednesday to slip below the 36,000-mark on heavy selling in IT, auto and telecom stocks, after the rupee collapsed to a new life-time low amid surging crude oil prices.

Defending the decision, the bank said it was acting "to further strengthen domestic macroeconomic fundamentals".

The government announced a Rs 2.50 per litre cut in petrol and diesel prices after it reduced excise duty by Rs 1.50 a litre and asked oil companies to absorb another Re 1. The RBI doesn't have any target or band in mind and acts only to manage volatility. 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. "Against this backdrop, the impact of cost-push factors should be limited and transient and, as the output gap again turns negative, underlying inflation should converge back towards 4.5 per cent".

The pause after two hikes since June puts the RBI a step behind peers in Asia, such as Indonesia and the Philippines, which have aggressively tightened policy to counter an emerging-market selloff triggered by higher United States rates and a stronger dollar. The NSE Nifty, too, stayed in the negative terrain through the session and hit a low of 10,843.75, finally ending 150.05 points, or 1.36 per cent, lower at 10,858.25. The government has raised import tariffs while the central bank allowed companies to raise more money overseas, but those have done little to stop the slide in the rupee.

Forex reserves had touched a record of Dollars 426.028 billion in the week to April 13, 2018, but have been declining since then on account of RBI intervention in market to stem fall in the rupee.

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