Rupee to see mild pressure with RBI rate decision, liquidity measures in focus
The Indian rupee is set to come under mild pressure at Wednesday's open with investors focused on whether the central bank will deliver its first rate hike in more than three years and how it plans to manage surplus banking system liquidity.
The rupee is expected to open between 96.44-96.46, per traders, having settled at 96.42 to the dollar on Tuesday. All eyes will be on the Reserve Bank of India at 10:00 a.m. local time on Wednesday.
A Reuters poll showed 35 of 61 economists expect the RBI to raise its repo rate by 25 basis points on Wednesday, while 26 expect no change. Swap markets indicate a 25-basis-point hike is fully priced and are leaving some room for a larger 50-basis-point move.
"A no-change decision would likely trigger heavy immediate pressure on the rupee and push forward premiums higher, while a 50-basis-point hike would provide a boost, though the impact would probably be short-lived," a currency trader at a private-sector bank said.
A 25-basis-point hike would likely see a more muted market reaction, he added.
Liquidity management is the other key area of focus for the market. The RBI has been using variable-rate reverse repos, sell-buy FX swaps and open-market bond sales to drain excess funds.
Investors will be looking for clues on whether the central bank plans to continue relying on temporary tools like variable rate reverse repo auctions or take more durable steps to absorb liquidity.
"Although durable liquidity has been withdrawn through open market bond sales and FX operations (spot dollar selling and sell-buy swaps), core liquidity surplus remains high," analysts at IDFC First Bank said in a note.
"The RBI’s immediate challenge will be to keep the weighted average call rate aligned with the repo rate while excess liquidity remains in the system."
($1 = 96.39 Indian rupees)
(1 Indian rupee = $0.0104)
