RBI shifts to a tightening stance while lowering inflation projections

Rupee plunges to fresh record low of 73.77 against dollar

In a volatile trade at the inter-bank forex market on Wednesday, the rupee opened below the 73-mark at 73.26 against the dollar as it moved in sync with oil prices which at one time breached the $85-per-dollar mark and settled a tad lower at $84.86 per barrel.

India's central bank kept its key benchmark rates unchanged in a surprise decision, on Friday, while shifted its policy stance to "calibrated tightening" from neutral.

The usual central bank response to a weak currency is aggressive policy tightening, like Indonesia and the Philippines, who have had 150 bp rate hikes recently.

"Inflation is projected at 4 per cent in second quarter (July-September) 2018-19, 3.9-4.5 per cent in H2 (October-March) and 4.8 per cent in Q1:2019-20 (April-June), with risks somewhat to the upside", it added. Market is reacting strongly to Brent crude movements and with current pace 75 can likely be seen if crude touches 88-90 levels.

Mr Khoon Goh, head of Asia research at ANZ Banking Group in Singapore, said the mix of strong U.S. data and the Fed chair's comments bumped up the dollar and USA bond yields, putting downward pressure on Asian currencies.

Meanwhile, RBI Governor Urjit Patel Friday reiterated that the domestic currency is still better than its emerging market peers and that the apex bank does not have a target for it.

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The fact that higher interest rates will compound the liquidity problem was a setback for the consensus view on the RBI policy.

The rupee, which is now Asia's worst-performing tender and has lost around 14 percent of its value against the U.S. dollar this year, has been under pressure from rising oil prices and higher USA interest rates. "I feel there will be an increase of 25 basis points in the repo rate", Union Bank of India managing director and chief executive Rajkiran Rai G said.

"The first thing that came to my mind when I saw the decision was that RBI seems to be more confident than the market on the dollar-rupee", Ashish Vaidya, executive director and head of trading at DBS Bank in Mumbai.

High oil prices have been squeezing the rupee, making it less appealing to investors, analysts say.

In the latest of a series of attempts to calm markets, the government late on Wednesday said it would allow state oil marketing companies (OMCs) to raise $10 billion in overseas loans to help them cover the sharp rise in price for imported oil. Home loan rates remain untouched - in theory, as per the RBI's stance.

India's wholesale inflation fell to a four-month low of 4.53 per cent in August on softening of food prices. Going forward, the inflation outlook is expected to be influenced by several factors, RBI said.

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