The Indian rupee declined 7 paise to close at 95.83 against the US dollar on Thursday, driven by heightened geopolitical tensions between the US and Iran that increased energy volatility and safe-haven buying pressure. According to The Hindu, the currency opened at 95.70 against the US dollar, touched an intra-day low of 95.85 and a high of 95.59 before closing at 95.83 (provisional). This follows Wednesday's depreciation of 40 paise to close at 95.76 against the US dollar. Forex traders said the prolonged West Asia crisis poses a major risk for India, which relies heavily on energy imports. The latest decline continues the rupee's recovery from a lifetime low of 96.96 hit around mid-May, which was supported by Reserve Bank of India intervention in spot and forward markets. Five traders confirmed that India's central bank was likely selling dollars through state-run banks and pairing these with buy-sell dollar/rupee swaps to support the currency. Heavy bids from oil marketing companies have kept the rupee under pressure for the entire day, with traders expecting the rupee to trade in the range of 94.75 to 95.75 on Wednesday.
The Reserve Bank of India is likely to keep the benchmark repo rate unchanged at 5.25% in the upcoming June monetary policy review, with economists expecting the central bank to maintain a clear separation between monetary policy and exchange-rate management. According to Nomura, "The RBI is an orthodox inflation-targeting central bank. An interest-rate defence of the currency could lead to expectations of policy tightening whenever the rupee weakens, which would be a dangerous policy precedent." Of the respondents surveyed, 11 expect the Monetary Policy Committee (MPC) to maintain the status quo on rates in the upcoming policy to be announced on Friday, while four foresee a 0.25% hike. As per IDFC First Bank's Gaura Sengupta, "Pause because headline inflation remains below the 4 per cent target. The RBI has policy space to wait to see the second round impact on inflation from the fuel price hike. Flexible inflation target provides policy space to look through the first round impact of supply side shocks." The MPC will meet between June 3 and June 5 to decide on the policy rates, with the central bank having reduced the repo rate by 1.25% since last year to aid growth. Despite expectations of a pause in June, most participants expect at least two rate hikes during FY27, with some anticipating more than two increases if inflationary pressures intensify. Rates markets are more aggressive with overnight-index swaps pricing a 100 basis point of tightening in this cycle, according to IndusInd Bank Ltd.
The cabinet is likely considering steps this week to make it more attractive for foreign investors to buy the nation's bonds, as authorities look to stem outflows that have pushed the rupee to record lows, according to Bloomberg News. This government support package is expected to take pressure off the Reserve Bank of India to tighten monetary policy this week. Bloomberg News surveyed 35 economists, with 29 out of 35 expecting the RBI to keep the benchmark rate at 5.25% on Friday. "There are two broad fronts being closely watched – a likely package to shore up the rupee, and the decision on policy rates," economists at HSBC Holdings Plc led by Pranjul Bhandari wrote in a note. Investors will keenly watch Governor Sanjay Malhotra's televised statement at 10 am for any potential announcements on measures to shore up the rupee. India may cut capital gains tax on foreign investment in government bonds as one way to boost inflows, according to Reuters and other news media reported on Thursday. Other measures widely anticipated include schemes incentivising non-resident deposits and hedging cost relief for companies raising overseas debt. The primary catalysts for the market recovery were breaking news of potential tax concessions for foreign institutional investors (FIIs) and tentative signs of easing in global geopolitical tensions. "If Friday's RBI policy does not deliver steps to support the currency, expect renewed pressure, especially now that the rupee has corrected and forward premiums have come off," said a currency trader at a private sector bank. "Unlike 2013, the RBI is unlikely to weaponise interest rates purely to defend the currency," said Sneha Pandey, fixed-income fund manager at Quantum Asset Management. "This is not a central bank cornered into emergency tightening."
The dollar index, which gauges the greenback's strength against a basket of six currencies, was trading at 99.31, down 0.21%, while Brent crude, the global oil benchmark, was trading lower by 2.04% at USD 95.81 per barrel in futures trade. According to Mirae Asset ShareKhan's Anuj Choudhary, "We expect the rupee to trade with a negative bias on geopolitical tensions and firm US treasury yields. Any bounce back in the US dollar may also pressurise the rupee. Crude oil prices continue to remain elevated." Choudhary added that any positive development from the US-Iran peace talk front may prevent a sharp fall for the domestic unit. Traders may take cues from weekly unemployment claims data from the US today (Thursday) and the non-farm payrolls report on Friday, with USDINR spot price expected to trade in a range of 95.40 to 96.15. On the domestic equity market front, Sensex advanced marginally by 13.84 points to settle at 74,360.01, while the Nifty was up 10.95 points to 23,416.55. Foreign institutional investors offloaded equities worth ₹5,616.56 crore on a net basis on Wednesday, according to exchange data. Indian equity benchmarks ended flat but resilient today, recovering from early intraday losses, with the market recovery attributed to breaking news of potential tax concessions for FIIs and tentative signs of easing global geopolitical tensions.
A majority of economists polled by ET predict the RBI will hold its policy rate steady at the upcoming June meeting, with 11 of 15 economists forecasting a pause on the repo rate. According to Standard Chartered's Anubhuti Sahay, "We now think the MPC is likely to begin hiking from the June meeting, as domestic inflation risks are rising, alongside higher global yields; a few Asian central banks have already delivered surprise hikes. Our FY27 rate hike forecasts face upside risk of 0.25-0.50 per cent if pressures on commodity prices, rupee sustain." Most respondents expect FY27 consumer price inflation estimates to be raised to around 4.9-5.5%, following the rise in global crude oil prices and recent increase in domestic petrol and diesel prices. As per Icra's Aditi Nayar, inflation could rise to around 5% in June as higher fuel prices begin feeding into consumer prices, though the extent of second-round effects remains uncertain. CareEdge Ratings reports that inflationary concerns have intensified due to projected below-normal monsoon and recent retail fuel price hikes, with a sharp rise in WPI inflation raising risks of faster second-round pass-through to consumer prices. Economists expect the central bank to acknowledge rising inflation risks from higher fuel prices, geopolitical uncertainty and the possibility of an El Niño event, with most expecting the RBI to raise its inflation projections for FY27 while maintaining a cautious stance on rates. For now, high frequency data show India's growth is holding up and inflation remains contained, with the government maintaining its growth forecast range of 6.8% to 7.2% for the fiscal year through March 2027.
