Rupee Falls: RBI Policy & US Dollar Impact

Mumbai, Dec 5 (PTI) The rupee, which opened on a positive note, gave up its initial gains and breached the psychological 90-to-a-dollar level after the Reserve Bank cut key benchmark interest rate for the first time in six months on Friday.

Forex traders said the Reserve Bank of India's (RBI) rate cut will push the rupee even lower until foreign portfolio investors return in a big way.

The RBI on Friday cut the key benchmark interest rate for the first time in six months and took steps to boost liquidity to support a "goldilocks" economy amid high US tariffs.

At the interbank foreign exchange market, the rupee opened at 89.85 against the US dollar and gained ground, touching 89.69 in morning deals, registering a 20-paise gain from its previous close.

After the RBI's monetary policy announcement, the rupee lost ground and fell to 90.05 against the American currency, a 16-paise decline from its previous close of 89.89. The currency is down almost 5 per cent against the dollar this year, the worst performer in Asia.

Reserve Bank Governor Sanjay Malhotra said the central bank does not target any band for the rupee in the forex market, and allows the domestic currency to find its own correct level.

"We don't target any price levels or any bands. We allow the markets to determine the prices. We believe that markets, especially in the long run, are very efficient. It's a very deep market," he said while replying to a question on rupee depreciation at a post-monetary policy press meet.

Malhotra said fluctuations in the market keep occurring, and the RBI's effort is always to reduce any abnormal or excessive volatility. "And that is what we will continue to endeavour," he added.

In its bi-monthly monetary policy, the RBI announced three-year USD/INR Buy Sell swaps of USD 5 billion this month.

When asked if this is aimed at checking rupee depreciation, Malhotra said, "It is a liquidity measure. It is not to support the rupee".

Stressing that RBI does not target any level of rupee against the dollar, he said the central bank allows "the rupee to find its correct position, correct level".

The governor further said the country has sufficient foreign exchange reserves and that the current account is manageable, and that, given the strong fundamentals of the economy, the country should witness strong capital flows going forward.

Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, was trading 0.02 per cent lower at 98.97.

Brent crude, the global oil benchmark, fell 0.17 per cent to USD 63.15 per barrel in futures trade.

On the domestic equity market front, Sensex advanced 488.75 points to 85,754.07, while the Nifty was up 163.25 points to 26,197.

Foreign institutional investors sold equities worth Rs 1,944.19 crore on a net basis on Thursday, according to exchange data.