Rupee weakens against US dollar as inflation rises

Mumbai: The Indian rupee on Wednesday weakened against the US dollar after retail inflation rose to a four-month high. Traders will also keep an eye on the US Federal Reserve policy decision later in the day.

At 2pm, the rupee was trading at 67.69 against the US dollar, down 0.30% from its previous close of 67.49. The currency opened at 67.60 a dollar and touched a low of 67.70 a dollar.

The 10-year bond yield stood at 7.93% from its Tuesday’s close of 7.97%. Bond yields and prices move in opposite directions.

Consumer price index (CPI)-based inflation rose to 4.87% in May, marginally higher than RBI’s revised inflation projection of 4.85% for April-September. Core inflation (CPI ex-food and beverages, fuel) rose further to 6.3% year on year in May from 6.1% in April.

“The data suggest that adverse macro headwinds are resulting in higher inflationary pressures and some softening in growth momentum at the margin. We expect the Reserve Bank of India (RBI) to deliver another 25bp rate hike in August, owing to persistence in core momentum in May and our expectation that inflation will remain elevated in the near term. Beyond August, we expect the current tightening of financial conditions to start to slow the growth cycle and lead to rates on hold. Global factors (oil, balance of payment funding) are the main risks to our baseline view of policy status quo” said Nomura Global Research in a note to its investors .

The Federal Reserve is expected to raise interest rates Wednesday, while European Central Bank members are poised to hold the first formal talks on ending its bond-buying program Thursday. The Bank of Japan meets Friday, with no change to policy expected.

So far this year, the rupee has weakened 5.6%, while foreign investors have bought $169 million and sold $4.65 billion in equity and debt markets, respectively.

Benchmark Sensex Index rose 0.40% or 143.58 points to 35,836.10. Since January, it has gained 4.1%.livemint