Rupee falls to 5-week low on no rate cut; pressure back on FM

The rupee fell to a new five-week low after the central bank kept interest rates unchanged, shifting the pressure on the government to take additional steps to revive growth and contain the fiscal deficit.

hidden October 30, 2012 14:51:23 IST
Rupee falls to 5-week low on no rate cut; pressure back on FM

The rupee fell to a new five-week low on Tuesday after the central bank kept interest rates unchanged, shifting the pressure on the government to take additional steps to revive growth and contain the fiscal deficit.

The disappointment over the Reserve Bank of India decision to keep the repo rate on hold at 8 per cent was compounded after the central bank signalled no further policy easing would take place until the January-March quarter of next year.

The central bank also cut its baseline economic growth forecast for the fiscal year to 5.8 per cent from 6.5 per cent, while raising its estimate for wholesale price inflation to 7.5 per cent from 7 per cent.

Rupee falls to 5week low on no rate cut pressure back on FM

The partially convertible rupee was at 54.0525/0650 p er dollar

The RBI's decision comes despite increased political pressure from the government, which last month unveiled a slew of fiscal and economic reforms, while Finance Minister P Chidambaram on Monday pledged to contain the fiscal deficit.

"A combination of pushing rate easing further away, and expectations of higher inflation and slower growth, will weigh on sentiment," said Dariusz Kowalczyk, senior economist and strategist for Asia ex-Japan for Credit Agricole in Hong Kong.

"The forecasts also make it more difficult for the RBI to trust the government's fiscal target, and indeed the central bank suggested it will wait for proof of consolidation."

The partially convertible rupee was at 54.0525/0650 p er dollar, marginally higher versus its previous close of 54.08/09. It fell to a session low of 54.195, its lowest since Sept. 21.

Falls in the rupee tracked declines in local shares, with the benchmark BSE index down 0.78 per cent.

The lack of a rate cut from the central bank threatens to continue a period of consolidation for the rupee, which rallied to a monthly high of 51.32 on Oct. 5, the highest since April, on the back of the government's fiscal and economic reforms.

Although few analysts expect the rupee to fall back towards the record low of 57.32 seen in late June, a lack of triggers could lead to range-bound trading until the end of the calendar year, they said.

"It will take improvement in data for the currency to see a sustained recovery, and for sentiment towards India to improve in a lasting way," said Kowalczyk, who has a year-end target for the rupee at 54.50.

Reuters

Updated Date:

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