Rupee Surges Ahead of RBI Decision: Will a Rate Cut Widen the Gap or Attract Funds?

The Indian rupee began the trading session on a stronger note on December 5, opening at 89.85 against the US dollar, marking a 13-paise gain from the previous day's close. This movement occurs just before the Reserve Bank of India's (RBI) monetary policy committee announces its decision.

RBI Monetary Policy Outlook

• A consensus among economists, treasury heads, and fund managers, as surveyed by Moneycontrol, suggests the RBI's monetary policy committee is likely to reduce the repo rate by 25 basis points (bps).
• This anticipated rate cut is primarily driven by the sustained low Consumer Price Index (CPI) inflation figures observed over the past two months, providing the central bank with room for manoeuvre.

Expert Analysis on Rupee Depreciation

• Kunal Sodhani, head of treasury at Shinhan Bank, expressed concerns that a rate cut, while inflation is low, could exacerbate the rupee's current pressures.
• He noted that reducing the repo rate would widen the interest-rate differential between India and other economies, potentially triggering increased capital outflows and accelerating the depreciation of the Indian rupee.

Recent Rupee Movements and Market Sentiment

• On December 4, the rupee closed below the significant 90-per-dollar mark, attributed by currency traders to likely intervention by the RBI.
• Earlier on the same day, the currency had touched a new record low, breaking below the 90 level, influenced by ongoing uncertainty surrounding US trade deals which has been eroding market sentiment.
• Analysts, however, point out that the rupee's sharp undervaluation historically acts as a magnet for foreign investors to return to local assets.
• This historical pattern suggests that the potential for further significant downside in the rupee may be limited.
• Abhishek Goenka, founder & CEO of India Forex Asset Management-IFA Global, provided a forecast, stating, "We expect rupee to trade in the 89.80-90.20 range with sideways price action."

Impact

This news directly impacts the currency market by signaling potential volatility ahead of the RBI policy decision. A rate cut could affect import costs, inflation, and foreign investment flows, indirectly influencing the stock market's performance and investor sentiment.

Impact Rating (0–10): 7

Difficult Terms Explained

• Repo Rate: The rate at which the central bank (RBI) lends money to commercial banks. A cut typically makes borrowing cheaper.
• Basis Points (bps): A unit of measure used in finance to describe the percentage change in a financial instrument or market. 100 basis points equal 1 percent.
• Consumer Price Index (CPI) Inflation: A measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
• Interest-Rate Differential: The difference between the interest rates of two countries, which can influence capital flows.
• INR Depreciation: A decrease in the value of the Indian rupee relative to other currencies, meaning it takes more rupees to buy one unit of a foreign currency.
• Foreign Portfolio Investment (FPI) / Foreign Institutional Investors (FIIs): Investments in a country's securities and financial assets made by investors from other countries.
• Undervaluation: When a currency is trading below its perceived intrinsic or fair value.