Rupee Plunges 43 Paise to Close at Record Low of 96.78 Against US Dollar Following RBI Rate Hike

The Indian rupee surrendered ground on Wednesday, tumbling 43 paise to close at an all-time low of 96.78 (provisional) against the US dollar. The sharp drop came immediately following the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) decision to raise the benchmark repo rate by 25 basis points to 5.50% from 5.25% in an effort to rein in inflation stoked by persistent external shocks.

At the interbank foreign exchange market, the local currency opened at 96.37 before swinging between an intraday high of 96.34 and a low of 96.84 against the greenback. It eventually settled at 96.78, down 43 paise from its previous closing level of 96.35.

Key Drivers Behind the Currency Slump

Market participants pointed to a confluence of global headwinds and local factors driving the rupee's weakness:

• Escalating Geopolitical Pressures: Expanding conflict in West Asia has injected significant risk aversion into emerging market assets, dampening appetite for the domestic currency.
• Surging Global Crude Prices: Brent crude hovered near multi-month highs, trading at elevated levels above $101 per barrel, intensifying India's import bill and expanding the trade deficit.
• Firm US Dollar Index: The greenback maintained considerable strength, trading above 102 on the dollar index (DXY), bolstered by elevated US Treasury yields and resilient economic data.
• Sustained FII Outflows: Foreign institutional investors continued to offload Indian equities on a net basis, generating persistent demand for US dollars.

RBI Governor's Stance on Exchange Rate

Addressing the post-policy press conference, RBI Governor Sanjay Malhotra noted that the rupee appears undervalued on several metrics, including the Real Effective Exchange Rate (REER). He reiterated that the central bank does not target a specific exchange rate level but remains vigilant against disorderly market fluctuations.

"There can be an argument, as some people have made, that it is perhaps, on nominal or real effective exchange rate terms, it may be undervalued," Governor Malhotra stated, emphasizing that underlying macroeconomic fundamentals remain sound and that the currency could rebound once geopolitical uncertainties abate. He affirmed that the RBI would step in with liquidity and market operations to curb speculative volatility.

Domestic Equities End Lower

The policy decision and currency weakness spilled into the equity markets. The benchmark BSE Sensex dropped 429 points, snapping a two-day advance as the hawkish monetary stance and elevated energy prices weighed on investor sentiment. The NSE Nifty also ended lower, pressured by banking, auto, and consumer discretionary stocks facing margin headwinds from higher borrowing costs and currency depreciation.

Analysts anticipate near-term volatility for the USD-INR pair, expecting trading bands between 96.20 and 97.10, with market direction closely tied to crude oil trajectories and central bank intervention in the foreign exchange market.

Tags: Reserve Bank of India BSE Sensex NSE Nifty Crude Oil Sanjay Malhotra Forex Market