Rupee steady ahead of RBI policy review

Rupee steady ahead of RBI policy review

Mumbai: The Indian rupee was largely steady in mid-morning trade on Thursday as losses in Asian peers and majors were offset by hopes for a rate increase at the Reserve Bank of India’s policy review due at noon,

Dealers were also watching the local stock market for cues on the direction of capital flows, which are a key determinant of the rupee’s fortunes.

The central bank at its first-ever mid-quarter policy review is widely expected to raise key rates by 25 basis points each.

At 10:20am, the partially convertible rupee was at Rs46.34/35 per dollar, little changed from its close of Rs46.35/36 on Wednesday.

“The rupee is largely tracking other Asian currencies which are weakening on yen intervention fears. Medium-term direction for the rupee now depends mainly on whether risk appetite scenario continues or whether it reverses sharply," a senior dealer with a private bank said.

“If the rupee stays weaker, then 46.28/30 levels and the ‘risk off´ mode starts again; then rupee could weaken sharply."

Most Asian units were weaker against the dollar while the U.S. unit’s index <.DXY> against six major currencies too was 0.1 percent higher. [EMRG/FRX] and [USD/]

Ashtosh Raina, head of foreign exchange trading at HDFC Bank, said the rupee was unlikely to weaken sharply as rate hike expectations would keep the fall in check.

Higher interest rates in India as compared with other major economies attract more foreign fund inflows, which indirectly boost the rupee.

Indian shares flip-flopped on Thursday morning, with financials rising ahead of the central bank’s mid-quarter policy review.

Foreign funds have bought shares worth $14.7 billion so far in 2010, in addition to last year’s record $17.5 billion.

Dealers said the spot rupee was most likely to track the local shares immediately after the central bank’s policy decision, but forward premiums could ease a bit if the rates were hiked by an expected 25 basis points.

One-month offshore non-deliverable forward contracts were quoted at Rs46.53, weaker than the onshore spot rate, suggesting a bearish near-term outlook.

In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX were both at Rs46.4075, with the total traded volume on the two exchanges at about $922 million.