Rupee opened low today at 62.2425 after surprising RBI announcement on removal of gold import restriction last week. RBI removed 80:20 rule that may lead to heavy import from major gold trading houses.
To reduce distortion of gold trades the Central Bank removed 80:20 restriction that weakened rupee to 9 month low. On the other side equity indices are continuously gaining mainly on expectation of interest rate cut by RBI in tomorrows meet. NIFTY gained by 0.13% to 8566 and Sensex advanced 0.10% to 28723.
Indian Bonds also gained as investors are expecting rate cut after slow GDP and low inflation. OPEC decision to continue oil production may also cushion RBI to take decision to lower benchmark interest rate.
RBIs stance on Gold restriction may not continue if trade gap widens. At present lower oil prices has supported to narrow trade deficit.
Rupee may depreciate gradually in coming days as the domestic currency is performing comparatively better than other emerging market currencies. Too strong performance of rupee against its peers may make it less competitive for exports. High imports and low earnings on exports may harm trade balance. Intervention of Central Bank has also kept rupee in range and has not let it move freely with change in interest rate and inflation differential.
To not to depreciate rupee heavily central bank may buy dollar from the market periodically or may make changes in interest policy. Change in policy will have negative impact on currency for short time but for long term perspective it is beneficial as it will boost economic growth. At present majority are not expecting any change in interest rate but there is still room for interest rate cut.
Pending decisions on insurance bill, land acquisition and coal could also have significant impact on economy.