The Indian rupee weakened on Friday as the central bank disappointed markets with a hawkish tone in its annual monetary policy, despite delivering a widely expected 25 basis point rate cut.
India's central bank cut its benchmark interest rate for the third time since January, as growth slows and inflation ebbs, but said there is little room to ease monetary policy further.
"I feel lucky to have a 25 bps cut after reading the macroeconomic report yesterday," said Vikas Babu Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank.
"RBI is clear that it is targeting inflation and will not compromise on inflation in favour of growth. Highlighting of the current account deficit is again a worry," he added.
Bets on future rate cuts have been significantly reduced post the policy statement on Friday, hurting all markets including bonds, equities and the rupee. Analysts now expect only another 25 basis point rate cuts in this calendar year.
The partially convertible rupee closed at 53.935/945 per dollar, weaker than its close of 53.81/82 on Thursday.
On the week, however, the rupee rose 0.8 percent as sentiment ahead of the policy had been broadly bullish, helped by the cut in withholding tax on debt investments by foreigners.
India on Monday cut the tax on interest payments to foreigners on government and corporate debt to 5 percent from up to 20 percent for a two-year period starting June, in a bid to draw further inflows to bridge the current account deficit and polish its reformist credentials.
Traders said the policy statement prompted investors to cover their short dollar positions and that rupee is likely to trade with a weaker bias next week.
"There is not much inflows expected. I see the rupee holding in a 53.70 to 54.50 range next week," Chittiprolu said.
In the offshore non-deliverable forwards, the one-month contract was at 54.07 while the three-month was at 54.60.
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 around 54.08 with a total traded volume of $4.6 billion.