Rupee hits 2-month low of 96.53 against dollar after RBI rate hike

The Indian rupee fell to 96.53 against the US dollar on Wednesday (October 7), its weakest level in more than two months, after the Reserve Bank of India raised the repo rate by 25 basis points to 5.50%.

The rupee had been trading at around 96.36/$ before the RBI policy decision. The currency came under pressure despite the rate hike, as the central bank's decision was broadly in line with market expectations.

The RBI's Monetary Policy Committee (MPC) unanimously raised the repo rate by 25 basis points, the first increase since February 2023. The MPC also shifted its stance to 'calibrated tightening' from 'neutral', signalling a tighter policy approach.

Why rupee fell despite RBI rate hike

The rupee's move suggests that the rate hike itself was already largely factored into currency markets. Investors were also assessing the RBI's guidance on inflation, liquidity and the outlook for further policy action.

The RBI raised rates amid renewed inflation concerns, with retail inflation rising to 4.82% in August from 4.45% in July.

The central bank's decision also comes against the backdrop of elevated global uncertainty, including the ongoing West Asia crisis and its potential impact on crude oil prices and India's external position.

The repo rate hike is expected to increase borrowing costs for banks and other lenders, potentially raising EMIs for existing floating-rate borrowers and making new home, vehicle and corporate loans more expensive.

The rupee's fall after the RBI decision highlights that a higher domestic interest rate does not automatically translate into a stronger currency, particularly when the move is already priced in and global risk factors remain in focus.

-With agencies inputs