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The Indian rupee fell 46 paise to close at 62.23 against the US dollar today, in line with a sharp decline in local stocks, after a surprise hike in a key lending rate by the Reserve Bank of India (RBI).
RBI Governor Raghuram Rajan also partially eased liquidity-tightening measures that were introduced in July to curb volatility in the currency market.
Fresh dollar demand from importers and some banks put pressure on the Indian rupee, while heavy equity investments by foreign institutions restricted the fall to some extent.
The Indian rupee opened lower on the interbank foreign exchange market, at 62.05 a dollar from 61.77 previously, and reached a high of 61.88. After the rate hike, the local currency fell to 62.61 before recovering some ground at the fag end to close at 62.23, a drop of 46 paise or 0.74 per cent.
Reserve Bank of India (RBI) Governor Raghuram Rajan, in his maiden mid-quarter monetary policy review, unexpectedly raised the short-term lending (repo) rate to 7.5 per cent, seeking to tame inflation. The cash reserve ratio was unchanged.
To ease liquidity, the marginal standing facility rate, at which banks borrow from the RBI, was cut to 9.5 per cent from 10.25 per cent and the minimum daily maintenance of the cash reserve ratio was lowered to 95 per cent.
"The RBI seems to be confident that further weakening to the rupee would be protected in the near term," said Raghu Kumar, cofounder of RKSV Securities. "Thus, the RBI is focusing on bringing down inflation and bringing stability to the rupee by being hawkish with its policies through monetary tightening."
The RBI's decision surprised the stock markets and the benchmark S&P BSE Sensex ended 383 points lower. Foreign institutional investors bought a net USD 567.27 million of shares yesterday, according to data from Sebi.
The rupee climbed 161 paise yesterday after the US Federal Reserve decided to continue its bond-buying programme, easing fears of an immediate outflow of capital from emerging markets, including India.
The dollar index, a barometer of six rivals, was flat after the Fed's decision.