The greenback soared to a 15-month high against the Singapore dollar and stood tall against other Asian currencies on Thursday (Oct 4), after robust U.S. economic figures and bullish comments from the Federal Reserve boosted the dollar, prompting sustained regional outflows.
Consequently, the reverse repo rate under the LAF remains at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent. The risk to food inflation from spatially and temporally uneven rainfall is also mitigated, as confirmed by the first advance estimates that have placed production of major kharif crops for 2018-19 higher than last year's record.
Investors remained concerned over sustained foreign capital outflows and soaring crude oil prices that crossed the Dollars 85 per barrel. Government on Wednesday said that it will allow state oil marketing firms to raise $10 billion in overseas loans to help them deal with a sharp rise in crude oil prices and a falling rupee currency.
Thirdly, worldwide financial markets remained volatile with EME currencies depreciating significantly.
A plunging currency may prompt the Reserve Bank of India to hike interest rates for the third time since June when it meets on Friday.
"Fuel and gas prices are on fire and markets are scurrying".
The Sensex tanked 792.17 points or 2.25 per cent to close at a near 6-month low of 34,376.99, while the Nifty slumped 282.80 points or 2.67 per cent to 10,316.45.
The IL&FS debt problems have pushed up short-term interest rates sharply with one-year commercial paper rising by almost 70 basis points to 9.20 per cent since early August, while the one-year treasury bill rate is up 50 bps to 7.73 per cent.
DBS economist Radhika Rao expects a rate hike, along with the RBI shifting its stance to "hawkish" from "neutral".
One underlying concern is that the RBI's selling of dollars to stem the slide in the rupee has drained Rs 1.5 lakh crore from the banks since April. "The RBI is ready to keep real rates high because the policy mandate is to anchor inflation", said Anindya Banerjee, deputy vice president, currency derivatives at Kotak Securities.