The monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Wednesday began its three-day huddle to decide on interest rates and other monetary measures amid a slowing economy.
RBI’s policymakers are widely expected to prioritise growth by reducing the policy repo rate by 25 basis points though it is forecast to retain the neutral stance.
Some experts are also not ruling out the possibility of the central bank accompanying this with liquidity infusing measure include a cut in the cash reserve ratio (CRR) and open market operations (OMOs) through the purchase of bonds.
The expectations of a rate cut reportedly pulled down the dollar rupee forward premiums — when the forward rate is higher than the spot rate, the opposite is forward discount). Factors such as interest rate differential between two countries have a bearing on the forward premium.
A narrowing of interest rate differential brings down the forward rate. Recently, the US Federal Reserve held interest rates steady but its chief Jerome Powell signalled that it was in a no hurry to cut them.’
A Reuters report said that the one-year yield declined four basis points to 2.15 per cent. It is expected to stay between 2.15 per cent and 2.35 per cent if there is a rate cut and go up if the RBI goes for another pause.
The lower forward premium, however, did not drive down the spot rupee which continued to be under pressure amid persistent FII sales. The domestic unit ended at a record low of 87.47 against the dollar after hitting an all-time intra day low of 87.50.
Dealers said that intervention from the RBI prevented a steep fall in the domestic unit. The rupee had closed at 87.08 on Tuesday.
While the banking system is witnessing a liquidity deficit, the RBI had recently conducted a $5 billion buy/sell swap. In this, the central bank buys dollars from banks in lieu of rupee liquidity thereby infusing cash into the system.
This is reversed by the RBI returning dollars on August 4 at the forward rate which is estimated at around 97 paise.