The Indian rupee fell to a five-month low and neared a record low on Wednesday despite an interest rate hike and signals about further monetary tightening, with traders saying the policy was not hawkish enough to support the Asian currency.
The Reserve Bank of India raised the policy repo rate by 25 basis points to 5.5%, marking the first rise in nearly four years, and signalled more hikes by changing its stance to "calibrated tightening" from "neutral".
The rupee gave up early session gains to hit a low of 96.8450 per dollar, close to its record low of 96.96 hit on May 20, before ending 0.4% lower at 96.7750. Shares in Mumbai snapped two days of gains while bond yields rose modestly.
"The market was expecting more stern guidance on rates or liquidity. Since the 25 bp hike was expected and there was no 'shock value' in the statement, the rupee returned to behaving like it does in a scant inflow environment," a trader at a foreign bank said.
The rupee has been under pressure despite persistent interventions by the RBI and a lift from inflows of more than $140 billion garnered by the central bank's one-off policy measures.
Speaking to reporters after the policy, RBI Governor Sanjay Malhotra termed short-term financial market behaviour as "irrational" in response to a query on why currency forecasts and hedging continued to point to further rupee weakness.
"It is only in the long run they are able to find the right value," Malhotra said, adding that by a number of estimates, including the real effective exchange rate, the rupee may actually be "undervalued".
Analysts polled by Reuters expect the Indian currency to languish near record lows over the next three to six months.
The rupee is Asia's second-worst performer so far this year, battered by foreign portfolio outflows, elevated oil prices, rising global bond yields as central banks raise rates to combat inflation.
ANZ FX Strategist Dhiraj Nim said that the prolonged weakness in portfolio flows is a cause for concern, adding that macroeconomic resilience "may prove insufficient to offset a deterioration in the external backdrop".
ANZ expects two more 25-basis-point rate hikes in India by March 2027.
A broadly firmer dollar dragged the rupee alongside routine demand from corporates and bids related to portfolio outflows.
