The Indian rupee weakened 22 paise to 96.57 against the US dollar in early trade on Wednesday after the Reserve Bank of India (RBI) raised the repo rate by 25 basis points to 5.5 per cent. The rupee opened at 96.37 before losing ground and slipping to 96.57, compared with Tuesday's close of 96.35.
The decline came shortly after the RBI announced its first repo rate hike since February 2023. The central bank also shifted its monetary policy stance from 'neutral' to 'calibrated tightening', indicating that rate cuts are off the table in the near term.
RBI Governor Sanjay Malhotra on rupee
Amid the rupee's weakness, RBI Governor Sanjay Malhotra said the currency may be undervalued based on several measures, including the Real Effective Exchange Rate (REER).
Malhotra assured that the RBI would ensure that the rupee stabilises and moves in an orderly manner, while preventing excessive volatility. He said markets can be "irrational" in the short term but tend to find the right value over the long term.
"By a number of estimates, including the REER, the rupee is not overvalued; it may be undervalued," Malhotra said.
The Governor also indicated that the rupee could strengthen if geopolitical tensions, particularly the West Asia conflict, ease.
Why is the rupee under pressure?
The Indian currency has remained under pressure amid elevated crude oil prices, global uncertainty and a stronger US dollar. Brent crude was trading around USD 101.56 per barrel on Wednesday, while the dollar index was at 102.09.
India, being a major crude oil importer, remains vulnerable to higher oil prices as they increase the country's import bill and put pressure on the rupee.
Foreign fund outflows have also weighed on the currency. Foreign Institutional Investors (FIIs) sold equities worth Rs 2,961.30 crore on a net basis on Tuesday, according to exchange data.
RBI raises repo rate to 5.5%
The RBI's Monetary Policy Committee unanimously raised the repo rate by 25 basis points to 5.5 per cent from 5.25 per cent. It also raised the Standing Deposit Facility rate to 5.25 per cent, while the Marginal Standing Facility and bank rate were increased to 5.75 per cent.
The central bank has also raised its FY27 GDP growth forecast to 7.1 per cent, up by 40 basis points, while inflation is projected at 5.2 per cent for the financial year.
The rupee's movement, crude oil prices, foreign fund flows and global interest rates are likely to remain key factors for the currency in the coming sessions.
