The Indian rupee declined to its weakest level in over two months on Tuesday, closing at 96.42 per dollar, a 0.1% drop from the previous session. The currency's slide was driven by portfolio outflows from local equities, though intervention from state-run banks, acting on behalf of the Reserve Bank of India (RBI), helped mitigate further losses.
Financial markets are currently focused on the RBI's upcoming monetary policy decision scheduled for Wednesday. A Reuters poll of 61 economists indicates that approximately 60% expect a 25 basis point hike in the key policy rate. Swap markets have also priced in the possibility of a more aggressive 50-basis-point increase. The central bank has been actively managing liquidity in the lead-up to the meeting, utilizing dollar-rupee sell/buy swaps, open market bond sales, and reverse repo transactions to absorb excess cash from the banking system.
Government bonds remained largely rangebound as traders braced for the policy announcement. The benchmark 6.94% 2036 bond yield settled at 7.1928%, down slightly from 7.2108% on Monday. This yield has risen for seven consecutive weeks, gaining a cumulative 45 basis points. Analysts at J.P. Morgan noted that a combination of a rate hike, hawkish guidance, and tactical liquidity management could provide near-term support for the rupee.
Investors are particularly attentive to potential additional measures, such as debt sales or adjustments to the cash reserve ratio (CRR), to address surplus liquidity. Murthy Nagarajan, fixed income head at Tata Asset Management, stated that the bond market has already factored in 100 basis points of rate hikes in the current cycle, suggesting that the market may stabilize if the RBI Governor's commentary avoids extreme hawkishness.
When traders anticipate a monetary-policy decision, the rupee can react to expectations about interest rates, foreign capital and the central bank's liquidity stance even before any announcement. A two-month low describes a historical comparison, not a forecast that depreciation will continue. For companies, the effect depends on whether they import, export or carry unhedged foreign-currency debt. Readers should compare spot exchange rates with forward-market signals and wait for the RBI's written policy statement before treating market expectations as an official decision.
