Rupee weakens in afternoon trade; RBI policy in focus

Though a rate hike by the RBI on Friday is a given, the expectation over the quantum was widely split between 25 and 50 bps

The rupee weakened sharply in afternoon trade on Wednesday, as worries over the country's worsening external balance were heightened following a record trade deficit, while losses in the domestic stock market also added to the fall.

The partially convertible rupee was trading at 79.04 per dollar by 0800 GMT, compared to its close of 78.7125 on Tuesday.

India's provisional July trade deficit widened to $31.02 billion, pushed by a rise in crude oil and coal imports, from $10.63 billion a year earlier, a government official said on Tuesday.

"There have been concerns over the current account deficit rising sharply and the latest trade numbers add to the worry. With the Reserve Bank of India's (RBI) monetary policy on Friday, we can see some reversal of the recent rally in the rupee," a senior trader with a foreign bank said.

On Tuesday, the rupee rose to 78.49, its strongest level since June 28.

The dollar clung on in choppy trade after its biggest surge for weeks as US Federal Reserve officials talked up the potential for further aggressive interest rate hikes.

Though a rate hike by the RBI on Friday is a given, the expectation over the quantum was widely split between 25 basis points (bps) and 50 bps, according to a Reuters poll.

"We would recommend buying in this rally as the pair could see a quick reversal if the next US inflation print shows no signs of easing or the US labour market data remains strong – re-fueling large rate hike bets by the Fed," economists at HDFC Bank wrote in a note.

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

India's broader NSE share market was trading down 0.3%.