Key Takeaways
- The Indian rupee fell to a five-month low and approached a record low despite a 25 basis point interest rate hike.
- RBI Governor Sanjay Malhotra termed short-term market behavior as 'irrational'.
- Analysts expect the rupee to remain near record lows over the next three to six months.
The Indian rupee fell to a five-month low and approached a record low on Wednesday, despite the Reserve Bank of India (RBI) raising the policy repo rate by 25 basis points to 5.5%, marking the first rise in nearly four years.
The rupee hit a low of 96.8450 per dollar, close to its record low of 96.96 hit on May 20, before ending 0.4% lower at 96.7750.
Traders noted that the policy was not hawkish enough to support the Asian currency, with one stating, 'The market was expecting more stern guidance on rates or liquidity. Since the 25 bp hike was expected and there was no 'shock value' in the statement, the rupee returned to behaving like it does in a scant inflow environment.'
The rupee has been under pressure despite persistent interventions by the RBI and a lift from inflows of more than $140 billion garnered by the central bank’s one-off policy measures.
RBI Governor Sanjay Malhotra termed short-term financial market behavior as 'irrational' in response to a query on why currency forecasts and hedging continued to point to further rupee weakness.
Malhotra added that by a number of estimates, including the real effective exchange rate, the rupee may actually be 'undervalued'.
Analysts polled by Reuters expect the Indian currency to languish near record lows over the next three to six months.
The rupee is Asia’s second-worst performer so far this year, battered by foreign portfolio outflows, elevated oil prices, and rising global bond yields as central banks raise rates to combat inflation.
ANZ FX Strategist Dhiraj Nim said that the prolonged weakness in portfolio flows is a cause for concern, adding that macroeconomic resilience 'may prove insufficient to offset a deterioration in the external backdrop'.
ANZ expects two more 25-basis-point rate hikes in India by March 2027.
The market was expecting more stern guidance on rates or liquidity. Since the 25 bp hike was expected and there was no 'shock value' in the statement, the rupee returned to behaving like it does in a scant inflow environment.
A trader at a foreign bank, Trader
It is only in the long run they are able to find the right value.
RBI Governor Sanjay Malhotra, RBI Governor
