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Rupee gains will reduce pressure on RBI to sell dollars

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MUMBAI: The rupee registered its biggest single-day gain in 15 months, closing 50 paise higher at 79.26 in the interbank foreign exchange market on Monday. The rupee gained on expectations that the US Federal Reserve may not be very aggressive in rate hikes after the US economy contracted for the second successive quarter.
Friday’s close is the highest in three weeks. The rupee opened stronger, breaching 79.50 in early trade, and touched the day’s high of 79.20 before closing at 79.26, half a rupee stronger than the previous close of 79.76.
The rupee’s 50-paise gain on Friday, the sharpest since April last year, is seen as a reversal of the weakening trend in the first half of July. The appreciation will reduce pressure on the RBI to sell dollars from its forex reserves.
According to data released by the central bank, forex reserves dipped over $1.1 billion during the week ended July 22 to $571.6 billion. While the dip in foreign currency assets was $1.4 billion, improvement in value of gold and special drawing rights with the International Monetary Fund made up for some of the losses.
The currency appreciation has not diminished expectations of a rate hike by the RBI. Forecasters continue to expect the central bank to hike rates by 35-50 basis points (100bps = 1 percentage point) on August 5, when it announces its bi-monthly monetary policy review.
“It is a prudent strategy to maintain a certain minimum amount of interest differential, failing which there could be further adverse consequences for the rupee over the near to medium term. In this context, we think the RBI should deliver a 50bps rate hike in the August policy,” said Deutsche Bank in a report.
While generally rate hikes are positive for currency markets, many fear that this could hit investor sentiment. “Most capital flows come from equity investors, not debt,” said Saugata Bhattacharya, chief economist at Axis Bank. In early trades, the US dollar index was down half a per cent at 105.65. The greenback weakened against emerging market currencies. The Japanese yen registered its biggest weekly gain in four months as US bond yields fell.

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