THE rupee fell to its lowest in over a month on Monday, weakening past the 54-level against the dollar, as caution prevailed ahead of the central bank’s policy review and as the euro was dragged lower by uncertainty over Greece and Spain.
Most analysts expect the Reserve Bank of India to keep interest rates on hold on Tuesday, although they remain open to a cut in the cash reserve ratio, or the amount of deposits lenders must keep as cash with the central bank.
A decision not to lower India’s repo rate would defy growing political pressure on the central bank.
Finance Minister P
Chidambaram on Monday said the country was aiming to keep the fiscal deficit for this financial year at 5.3 percent, higher than the official target of 5.1 percent, but much lower than the 5.8 percent pegged by market estimates.
Still, the absence of any specific measures failed to spark any gains in the rupee. After the close of markets, the RBI said the reform efforts were a move in the right direction but again warned inflation remains a risk.
“If the RBI delivers a rate cut, or hints at one, we may see some large gains towards the 53.50- 53.20 zone,” said Subramanian Sharma, director at Greenback Forex.
“However, if the RBI does not cut, the rupee weakness should not extend beyond 54.20.” The partially convertible rupee closed at 54.08/09 p er dollar versus its previous close of 53.56/57. It fell to a session low of 54.09, its lowest since September 21.
A rate cut would boost the rupee by raising confidence in India’s economic outlook, and by potentially leading to increased foreign flows into domestic stocks.