With expectations of a rate cut by the Reserve Bank of India (RBI) gaining ground in the monetary policy review on Wednesday, the rupee on Tuesday staged a strong recovery by gaining 31 paise to end at 67.90 — its highest level in three weeks — on heavy dollar selling. The Sensex also gained 44 points in cautious trade on the BSE.
Forex dealers said the rupee gained support from a firm trend in equity markets alongside dollar unwinding by some foreign banks. The currency opened firmly higher at 68.14 from Tuesday’s close of 68.21 and hit an intra-day high of 67.8650 in late afternoon deals before ending at 67.90, showing a smart gain of 31 paise or 0.45 per cent.
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Analysts said expectations for an interest rate cut by the RBI in its Wednesday’s policy meet to rejuvenate the sagging economy against the back drop of softening inflations supported the currency upmove. This is the currency’s highest closing since November 16, when it had ended at 67.94 against the dollar. The rupee strengthened further against the pound sterling to finish at 86.60 from 86.71 and also edged up against the Japanese yen to close at 59.54 from 59.73 per 100 yens earlier, but weakened further against the euro to settle at 73.11 as compared to 73.01.
According to Abheek Barua, Chief Economist, HDFC Bank, while a case for 50 bps cut in the policy rate can be made if one takes a really dire view of the impact of demonetisation, there are too many balls up in the air at this time. “Apart from the impact of demonetization on growth, global factors such as the policy regime in the US, an impending Fed rate and its impact on global bond yields and currencies, political uncertainty in the euro zone and its impact on emerging market currencies, and rising global commodity prices with recently concluded OPEC deal and expectations of a massive fiscal stimulus in the US have to be factored in to the policy decision. We believe that this uncertainty is likely to hold back the RBI from cutting rates too aggressively in the December meeting,” Barua said.
Stock markets also ruled firm for the second day in a cautious trade ahead of RBI policy announcement tomorrow amid positive Asian cues. The 30-share Sensex opened on a positive note on across-the-board gains, but higher levels could not be sustained due to profit-booking towards the close, with the index closing marginally higher by 43.66, or 0.17 per cent, at 26,392.76. The index had risen 118 points on Monday in anticipation of a rate cut by the RBI. The broader NSE Nifty gained 14.40 points, or 0.18 per cent, to end at 8,143.15, after moving between 8,178.70 and 8,130.85.
Vinod Nair, Head of Research, Geojit BNP Paribas Financial, said, “a 25 bps rate cut is largely factored by the market while any surprise move by the Reserve Bank to spur growth with a 50 bps cut will provide further push for the market. …”