The rupee depreciated 22 paise to 96.57 against the US dollar in early trade on Wednesday, after the Reserve Bank of India (RBI) raised the key benchmark policy rate by 25 basis points to 5.5 per cent.
Market analysts said the RBI's rate hike reflects rising cyclical inflation risks, while the shift in stance to 'calibrated tightening' alongside higher growth and inflation projections highlights the MPC's hawkish approach.
At the interbank foreign exchange market, the rupee opened at 96.37, then lost ground and fell to 96.57, down 22 paise from its previous close.
On Tuesday, the rupee settled at 96.35 against the US dollar.
"The RBI's October hike acknowledges that cyclical inflation risks are no longer benign. The change in stance also underscores the RBI MPC's hawkish intent and is reinforced by upward revisions to growth and inflation forecasts," said Radhika Rao, Senior Economist and Executive Director, DBS Bank.
"The combination of higher inflation forecasts and calibrated tightening should keep front-end rates biased higher. The policy shift is modestly constructive for the INR, as wider rate differentials and a tightening bias bolster the currency's resilience to external shocks, even as a stronger US dollar remains a headwind," Rao added.
RBI reverses rate-cut cycle
The Reserve Bank of India on Wednesday raised the key benchmark policy rate by 25 basis points to 5.5 per cent in a bid to tame rising inflation amid the continuing West Asia crisis.
A hike in the short-term lending rate (repo) by the RBI marks a reversal from its previous policy action.
The RBI last hiked the repo rate in February 2023, raising it by 0.25 per cent to 6.50 per cent. It kept the rate unchanged through 2023-24 before beginning its rate-cut cycle in 2025.
Dollar, crude oil prices remain firm
Meanwhile, the dollar index, which gauges the strength of the greenback against a basket of six currencies, was trading at 102.09, higher by 0.25 per cent.
Brent crude, the global oil benchmark, was trading higher by 0.97 per cent at USD 101.56 per barrel in futures trade.
Sensex, Nifty trade lower
On the domestic equity market front, Sensex was trading 149.14 points lower at 72,918.67, while the Nifty declined 93.45 points to 22,682.65.
Foreign Institutional Investors (FIIs) offloaded equities worth Rs 2,961.30 crore on a net basis on Tuesday, according to exchange data.