Uncertainty in India ahead of expected rate hike

The Indian rupee lost ground on Wednesday after four straight sessions of gains as the country’s ballooning trade deficit and uncertainty around the upcoming central bank decision dented its appeal.

The partially convertible rupee closed at 79.16 against the dollar, erasing gains from the previous session, when it closed at 78.71.

India’s provisional July trade deficit widened to $31.02 billion from $10.63 billion a year earlier, as the country spent more on crude oil and coal imports, a government official said on Tuesday.

“The temporary relief we had seen on the back of a pullback in crude prices and a correction in the dollar index is over. We have to take domestic pressures into consideration,” said Swati Arora, an economist with HDFC Bank.

Funding the current account will be a challenge and inflationary problems have not yet gone away, making risks skewed towards the downside, Arora added.

The rupee touched a five-week high of 78.49 on Tuesday, but is expected to settle between 79-80 against the dollar in the near term.

It firmed as Indian equities saw inflows worth $1 billion over the past four days alone, said S. Hariharan, head of sales trading at Emkay Global Financial Services.

No one wants to make big bets ahead of the Reserve Bank of India’s monetary policy decision on Friday either as it is unclear what the size of the interest rate hike will be, a trader at a private bank said.

A rate increase is guaranteed but estimates range from 25-50 basis point (bps) with no clear consensus, a Reuters poll said.

If the RBI does not raise rates as aggressively as the Federal Reserve, it would widen the interest rate differential with the United States and India and prompt more foreign fund outflows from the country.