Indian rupee hits two-month low on outflows, investors await RBI outcome with hike priced in

MUMBAI: The Indian rupee slipped to its lowest level in nearly two months on Tuesday, due to outflows from local stock markets, with traders now eagerly anticipating the Reserve Bank of India's monetary policy announcement on Wednesday, where a hike is expected. Dollar sales by state-run banks, presumably on behalf of the RBI, helped to curb the rupee's decline.

The Indian currency closed the day at 96.42, a 0.1% decrease from the previous close. The central bank may have also executed dollar-rupee buy/sell swaps to reduce excess rupee liquidity in the banking system, according to traders. Out of 61 economists surveyed by Reuters, approximately 60% are predicting a 25 basis point hike, while swap markets have indicated a moderate chance of a more significant 50-basis point rate increase.

The last rate hike by the RBI was in February 2023, and investors will be closely watching the policymakers' statements for insights on the future direction of benchmark rates as India's third-largest economy tackles a challenging external situation. "We anticipate a mix of a 25 bps hike, hawkish guidance, strategic open market operations sales, and sell-buy FX swaps to provide some relief to the rupee, allowing the pace of monetary tightening to align with domestic growth-inflation dynamics," analysts from J.P.

Morgan stated in a report. A rate increase would strengthen the rupee by raising the cost of trading against the currency at a time when short positions remain strong due to ongoing energy supply risks stemming from conflicts in the Middle East. Asian currencies are largely trading within a narrow range, while the dollar index remains stable around the 102 mark.