The Indian rupee rose in early trading on Friday, tracking the gains in most Asian currencies, while dollar-rupee forward premiums dipped ahead of a closely watched monetary policy announcement by the Reserve Bank of India.
The rupee was at 87.46 (Dh23.83) against the US dollar as of 9.20am IST, stronger by 0.1 per cent on the day.
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The dollar index was little changed at 107.7, while Asian currencies were mostly up between 0.1 per cent and 0.4 per cent.
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The RBI will announce its policy decision at 10am IST and is widely expected to cut policy rates by 25 basis points, the first rate reduction in nearly five years.
Expectations of the rate cut, alongside persistent portfolio outflows and elevated dollar bids in the non-deliverable forwards market have hurt the rupee this week, with the currency hitting its lifetime low of 87.5825 (Dh23.72) on Thursday.
While traders’ outlook on reactions to the policy decision varies, most of them expect the central bank to curb undue volatility.
“Generally, the RBI is active on policy days. It (rupee) could be restricted to a very narrow range today,” a trader at a large private bank said.
Meanwhile, dollar-rupee forward premiums eased ahead of the policy decision, with the 1-year implied yield slightly lower at 2.17 per cent.
The 1-year yield has declined 8 basis points so far this month due to expectations of policy easing and the central bank’s ongoing measures to ease a liquidity crunch in the banking system, which were seen as a precursor to a rate cut.
A rate cut could help ease some of the pressure on the rupee by attracting foreign investments and would also lead to an increase in rupee supply, which could further weaken the currency, said Amit Pabari, managing director at FX advisory firm CR Forex.
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