Rupee drops further to 62.60 per dollar after RBI rate hike

              Joel Rebello    live Mint :Fri, Sep 20 2013. 12 17 PM IST

RBI rate hike prompts fears that the measure will lead to slower inflow of funds from foreign portfolio investors

Mumbai: The Indian rupee weakened against the dollar following Raghuram Rajan’s decision to raise its repo rate, or the rate at which the Reserve Bank of India (RBI) lends to banks, by 25 basis points (bps) to 7.5% in its maiden monetary policy review, prompting fears that the measure will lead to slower inflow of funds from foreign portfolio investors.

The Indian currency, which had opened lower, fell further following RBI announcement. At 11.45am, the rupee was trading at 62.39, down 0.97% from the previous close of 61.7750. It opened at 62.0450 and touched a high and a low of 61.8850 and 62.60, respectively.

Aman Mahna, forex dealer at FirstRand Bank Ltd, said dealers adjusted their dollar positions noting the fall in the local stock market.

“Overall I think this policy is positive for the rupee, because RBI is going by fundamentals. They have clearly said that rupee cannot be ignored and inflation is a priority which is good for the economy in the long run,” Mahna said.

On Friday, in its mid-quarter policy review, RBI reduced the rate on borrowing from the so-called marginal standing facility, an RBI lending window for banks, by 75 basis points to 9.5%. The rate had been raised by 2 percentage points in July.

RBI also reduced the daily balance limit for banks for the purpose of maintaining the cash reserve ratio (CRR), or the portion of deposits banks need to park with the apex bank, to 95% from 99%.

Mahna said he expects the rupee not to weaken much below 63 per dollar in the short term. “This is a short-term move. It may bounce back to 61.50 per dollar in the next few days,” Mahna said.

Soon after the RBI announcement, BSE’s benchmark Sensex fell 1.67% to 20,301.49 points. The National Stock Exchange’s Nifty also fell by 1.53% to 6,022.10 points.

The BSE Bankex dropped 2.88% to 12,331.62 points shortly after the announcement from 12,740.50 points before the announcement.