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Rupee Hits Low on Worries of Aggressive U.S. Rate Hikes

MUMBAI, Oct 20 (Reuters) - The Indian rupee slid to a record low for a second consecutive day on Thursday, weighed down by yet another jump in the U.S. dollar and Treasury yields on expectations that the Federal Reserve would continue with its aggressive monetary tightening.

Expectations of rate hikes in India have, on the other hand, been tempered since Friday, when the minutes of the latest meeting of the Reserve Bank of India's monetary policy committee (MPC) indicated a softer guidance on policy rates. 

The partially convertible rupee was trading at 83.16/17 per dollar by 0436 GMT, compared to its close of 83.02 on Wednesday. It tumbled 0.8% in the previous session, its worst single-day fall in nearly a month, due to dollar demand from two large state-owned corporates towards the end of the session.

"We can expect the dollar to continue strengthening as long as the Fed maintains its super hawkish stance. The overall trend of the USD-INR pair continues to be on the upside, but buying naked calls or futures at this point can be risky as RBI intervention can trigger stop losses," said Anindya Banerjee, head of research - FX and interest rates at Kotak Securities.

Overnight, Fed officials continued their hawkish rhetoric, with Minneapolis Fed President Neel Kashkari saying U.S. job market demand remained strong and underlying inflation pressures had probably not yet peaked.

The minutes of the RBI's MPC meeting and the post-policy press briefing by the central bank governor has suggested the RBI's rate-hike decision was unlikely to be influenced by the Fed and the sharp fall in the rupee.

MPC member Jayant Varma warned against using monetary policy to manage the fall in the currency, saying the external sector should be managed by other instruments.

Traders said the falling interest rate differential between India and the U.S. could continue to pressure the rupee.

Shilan Shah, India economist at Capital Economics, said in a recent note that 50 bps rate hikes may be off-the-table at the RBI's meeting in early December.

"We think other MPC members will have seen enough evidence of growth coming off the boil and price pressures peaking. As such, we remain comfortable with our long-held view that the MPC will now revert to hikes of 25 bps increments," Shah wrote.

Traders said the rupee breaching the 82.40-per-dollar mark was a key trigger for the currency's sharp fall Wednesday, as many believed the RBI had been holding the USD-INR pair at that level via intermittent dollar sales.

Most traders said the RBI would continue its sporadic intervention to prevent volatility in the rupee, but would not aim for any particular level as the dollar index is expected to rise further and there was little RBI could do about that.

The dollar index vaulted 1% and was back to trading over 113-levels. The Chinese yuan dropped 0.2% to sour sentiment and was another factor prompting the decline in Asian currencies.

Reporting by Anushka Trivedi and Swati Bhat; Editing by Savio D'Souza

Source: Reuters

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