The Indian rupee rose on Friday, defying subdued Asian cues, with caution prevailing ahead of a policy outcome that is expected to steer the currency's near-term outlook.
The rupee opened marginally higher at 95.7125 and rose to an intraday high of 95.6475, after settling at 95.7850 in the previous session.
The move higher at the open is largely flow-driven, possibly reflecting some position adjustment, a currency trader at a bank said.
"Overall, there will be caution around taking large positions. I would say the balance of risks is balanced, with the potential for a big move depending on how the policy turns out," the trader added.
The Reserve Bank of India is set to announce its policy decision around 10:00 am IST, with markets watching whether a rate hike is warranted amid rising pressure on the rupee and inflation concerns following the oil price jolt triggered by the Iran conflict.
Most economists do not expect the central bank to deliver a hike at this meeting.
The space for policy to remain on pause stems from the fact that the crisis comes at a time when there is excess capacity in the economy, IDFC Bank said in a note, pointing to current account deficit remaining below 1% of GDP for the last three years and core-core inflation staying below 4% for more than two years.
Using interest rates to defend the currency would require sharp hikes and carry significant growth costs, it added.
For the RBI, the key challenge will be attracting capital inflows when global conditions are likely to tighten due to the West Asia crisis, the bank said.
Meanwhile, cues from Asia were largely negative for the rupee, with most regional currencies down on the day and risk appetite subdued. Markets remained cautious amid worries over a flare-up in Middle East tensions, with U.S.-Iran talks still in limbo.
