LM:Rupee closes below 60 per dollar after RBI policy
Mumbai: The rupee fell sharply below the psychological 60 per dollar mark after the Reserve Bank of India (RBI) announced the monetary policy on Tuesday as banks adjusted their positions on the expectation that the central bank has limited room now to protect the rupee from falling further.
The rupee closed at 60.49 per dollar, down 1.76% from the previous close of 59.42. It had opened at 59.63 and touched a low of 60.58 during intra-day trade. Gains made after the RBI began liquidity tightening measures on 15 July have been erased.
Since the measures, the rupee strengthened as much as 58.70 per dollar on 26 July.
RBI kept interest rates unchanged on Tuesday but some of its comments in the policy announcement indicated that it doesn’t have too much ammunition to protect the rupee, said Gyan Harlalka, managing director and head of markets, India, at Royal Bank of Scotland Plc.
“The words RBI used like trilemma and impossible trinity and weaker external environment has again revived the dollar demand, which was strong in any case because of importers like oil companies and other commodity imports,” Harlalka said.
The central bank said, “India is currently caught in a classic ‘impossible trinity’ trilemma whereby we are having to forfeit some monetary policy discretion to address external sector concerns”.
The trilemma refers to the difficulty of simultaneously having free capital movement, a stable exchange rate and an independent monetary policy.
Since January this year, the rupee has weakened 8.39% and has lost the most among Asian currencies after the yen during that period.
The dollar’s strength against currencies, especially in Asia, also added to downward pressure on the rupee.
The dollar index, which measures the US currency’s strength against major currencies, was trading at 81.703, up 0.05% from the previous close of 81.663.
India’s benchmark Sensex ended at 19,348.34, down 1.25% from the previous close.
The 10-year bond stood at 8.244%, up 1.41% from previous close of 8.12%. It opened at 8.197% and touched a high of 8.266% earlier on Tuesday. One basis point is one-hundredth of a percentage point.
“Long-term bond yields had increased earlier today because there was some fear in the market that RBI will hike rates,” Harlalka said. “Since that has not happened, the yield has corrected.”
Short-term rates were however up. The call money rate was at 10% compared with its previous close of 10.1%. It opened at 10.25% and touched a high and a low of 10.25% and 9.75%, respectively.
