Rupee recovers from 5-wk lows; outlook weak after RBI

Last Updated: Tue, Oct 30, 2012 12:07 hrs

The Indian rupee recovered from a five-week low hit on Tuesday to end the session with mild gains on the back of a falling dollar, but the outlook for the local currency remains weak after the central bank kept interest rates unchanged.

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

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.

The focus will now remain on the government to continue its commitment with tangible steps towards reviving growth and shoring up the country's finances, analysts said.

"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 ended at 53.96/97 p er dollar, higher than its previous close of 54.08/09. It fell to a session low of 54.195, its lowest since Sept. 21.

Dealers said gains in the euro on the back of lower Spanish and Italian bond yields helped offset the rupee's losses. The local unit was also helped earlier in session by dollar selling by a software firm and a large private refiner.

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.

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

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.

In the offshore non-deliverable forwards market, the one-month contract was at 54.29 while the three-month was at 54.82.

In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 54.27 with a total traded volume at $5.2 billion.

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