Rupee down as RBI keeps rates intact

June 19th 2012

India’s rupee weakened, erasing earlier gains, after the central bank unexpectedly kept borrowing costs unchanged at a policy review on Monday, citing inflation risks.

The benchmark repurchase rate will stay at 8 per cent, the Reserve Bank of India said in a statement in Mumbai on Monday. Only four of 25 economists in a Bloomberg News survey predicted the outcome, with 19 expecting a 0.25 percentage-point cut and the remainder a half-point reduction.

The currency had advanced to a one-week high earlier as projections showed pro-bailout parties won enough seats to control Greece’s parliament, reviving investor interest in riskier assets.

“It’s a delicate balancing act, as growth momentum is poor and policy remains too restrictive in our view, particularly given the weaker international back drop,” Jonathan Cavenagh, a currency strategist in Singapore at Westpac Banking Corp, wrote in an emailed response. “Near-term risks are that the rupee will underperform broader risk-on move throughout the region.”

The rupee declined 0.2 per cent to 55.6050 per dollar as of 11.45am in Mumbai, according to data compiled by Bloomberg. It touched 55.2700 earlier, the strongest level since June 11. One-month implied volatility, a measure of exchange-rate swings used to price options, fell 25 basis points, or 0.25 percentage point, to 11.7 per cent.

Inflation

“While growth in 2011-2012 has moderated significantly, headline inflation remains above levels consistent with sustainable growth,” the monetary authority said on Monday. The decision contrasts with rate cuts in Brazil and China in the past three weeks as the impact of Europe’s turmoil fans through Asia and dominates the agenda of a Group of 20 summit starting in Mexico on Monday.

Greece’s New Democracy and Pasok parties won enough seats to form a majority in the 300-member parliament, according to an official projection, easing concern the nation would reject austerity measures needed to qualify for international aid.

Three-month onshore currency forwards traded at 56.54 per dollar, compared with 56.61 on June 15, and offshore non- deliverable contracts were at 56.60 from 56.72. Forwards are agreements to buy or sell assets at a set price and date. Non- deliverable contracts are settled in dollars.