The rupee rose sharply against the dollar on Tuesday after foreign banks started selling the US currency following the Reserve Bank of India’s (RBI’s) third quarter monetary policy announcement.
The RBI on Tuesday hiked its key lending rate by a quarter of a percentage point, continuing its fight against inflation in Asia’s third-largest economy. RBI hiked the repo rate, at which it lends short-term funds to banks, to 8%. The apex bank retained the cash reserve ratio (CRR), or the amount of deposits banks needs to park with the central bank and on which they earn no interest, at 4%.
RBI governor Raghuram Rajan’s statement that the central bank is far from accepting Urjit Patel committee but is only looking at the suggestions, indicated that the central bank has not yet embraced an inflation targeting mandate, foreign exchange dealers said. Rajan also said the monetary policy could be more “accommodative” if inflation eases in the coming months.
“RBI’s statement that even in the face of a growth slowdown, it increased the rate to stem out inflation is a very strong and excellent external image to have,” said Arvind Sampath, head of treasury at Fullerton India Credit Co. Ltd.
“Some of the statements by the RBI governor assured the market that the policy rates could soften going forward and that the approach is very flexible. This is good for the market,” said a currency dealer of a foreign bank who did not want to be named.
Rajan’s statement suggesting that long-term debt investors remain committed to India if the RBI can bring down inflation to assuage these foreign investors was also seen as a positive for market sentiment, said currency dealers.
The domestic currency closed at 62.515 per dollar, up 0.94% from the previous close of 63.10. The unit had opened at 63.18 per dollar and strengthened as much as 62.505 per dollar.The yield on India’s 10-year benchmark bond ended at 8.751% as compared with its previous close of 8.768%.
Source:- livemint.com
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