Home / Market / Stock-market-news /  Rupee weakens 0.81% as Rajan surprises with rate hike

Mumbai: The rupee recovered some of its losses but ended lower against the US dollar on Friday following the Reserve Bank of India’s (RBI’s) decision to raise its repo rate, or the rate at which it lends to banks, by a quarter of a percentage point.

Traders bought dollars on expectation that a higher benchmark rate will drive up borrowing costs further and hence slow economic recovery. Persistent sales of the US currency by exporters and companies on expectations that the rupee will rise further aided the Indian currency.

The rupee ended at 62.2775 per dollar, down 0.81% from the previous close of 61.7750 but off its intra-day low of 62.6025 per dollar.

Aman Mahna, forex dealer at FirstRand Bank Ltd, said dealers adjusted their dollar positions noting the fall in the local stock market.

“Overall I think this policy is positive for the rupee because RBI is going by fundamentals. They have clearly said that rupee cannot be ignored and inflation is a priority, which is good for the economy in the long run," Mahna said.

On Friday, in its mid-quarter policy review, RBI reduced the rate on borrowing from the so-called marginal standing facility, an RBI lending window for banks, by 75 basis points to 9.5%. The rate had been hiked by two percentage points in July.

RBI also reduced the daily balance limit for banks for the purpose of maintaining the cash reserve ratio (CRR), or the portion of deposits banks need to park with the apex bank, to 95% from 99%.

The BSE’s 30-share benchmark Sensex ended at 20,263.71 points, down 1.85%, or 382.93 points from the previous close, as traders sold stocks fearing a hawkish tone from the RBI going ahead. Traders also booked profits after a 3.43% rise in shares on Thursday.

However, dollar sales by exporters and companies helped the rupee recover most of its losses.

“Initially the sales were from nationalized banks, but private sector banks also joined in.. The recovery in the rupee was sharp with 62.10 per dollar being traded at one point from 61.19 per dollar in a few seconds," said a dealer with a private sector bank.

Despite the recent rise in the Indian currency, the rupee has weakened 11.69% since January this year, making it the second biggest loser after the Japanese yen among Asian currencies during that period.

The RBI’s surprise repo rate hike also spiked bond yields higher. The 10-year bond ended at 8.55%, up 36 basis points from the previous close of 8.19%. It had opened at 8.21% and touched a low of 8.19%. One basis point is 0.01 percentage point.

India’s overnight call money rate ended at 9%, down 120 basis points from previous close of 10.20%. It opened at 10.38% and touched a high and a low of 10.38% and 6.50%, respectively.

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