The RBI's stance on maintaining an ultra-loose monetary policy, along with liquidity infusion amidst rising Covid cases, weakened Indian rupee by 1.5 per cent on Wednesday, its biggest intraday fall since August 2019.
Accordingly, the rupee closed at 74.55 to a US dollar after the Reserve Bank of India assured the markets of a stable and orderly evolution of the yield curve via a specific amount of open market purchases of government securities.
On Wednesday, Governor Shaktikanta Das said that the RBI will conduct G-SAP 1.0 to purchase Rs one lakh crore worth of government securities.
"Indian rupee registered the biggest intraday fall since August 2019, to close at 74.46 per dollar after the central bank's announcement of buying one trillion rupees ($14 billion) of bonds in the secondary market this quarter," said Dilip Parmar, Research Analyst, HDFC Securities.
"This liquidity infusion via the bond programme is considered a QE from the central bank which leads the unwinding of carry trades and short squeeze in USDINR. The loss on Wednesday has turned the rupee into Asia's worst performer for the month. Spot USDINR is expected to trade with positive bias and we could see a level of 74.90 in coming days while 74 becomes the support."
Rahul Gupta, Head Of Research, Currency, Emkay Global Financial Services, said: "The RBI policy was very interesting and it felt like a quantitative easing programme. The key takeaway is that the RBI will continue to maintain the ultra-loose monetary policy and infuse liquidity for a long time as the Covid surge will keep imparting uncertainty to the growth outlook."
"The forex market wasn't expecting such a dovish stance and the rupee got set on fire. The post-policy knee jerk reaction will simmer and the USDINR spot will trade in between 73.50-74.50."
Besides, the Reserve Bank retained its key short-term lending rates along with the growth-oriented accommodative stance during the first monetary policy review of FY22.
The Monetary Policy Committee (MPC) of the central bank voted to maintain the repo rate, or short-term lending rate, for commercial banks, at 4 per cent.
Likewise, the reverse repo rate was kept unchanged at 3.35 per cent, and the marginal standing facility (MSF) rate and the 'Bank Rate' at 4.25 per cent.