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Rate woes: Rupee to weaken as further repo cut expected

A likely cut in repo rate will weaken the Indian rupee, which has lately been supported by healthy fund inflows.

Analysts said that the currency will move into a range between 75 and 74.50 as rising forex reserves keep the rupee in check.

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) is expected to release its resolution on the monetary policy after its meeting on August 4 to 6.

It is widely expected that the RBI is likely to administer another dose of lending rate cut to aid the revival process from the Covid-19 induced economic downturn.

"The RBI is lapping up dollars heavily under 75 and speculators are supplying. A rate cut may marginally weaken the rupee, but not as much as a relatively undervalued rupee and high rate differential with the US can support the currency. A range of 75.25 and 74.70 is on cards," said Anindya Banerjee, DVP, Currency and Rates, Kotak Securities.

Recently, India's foreign exchange reserves increased by $4.99 billion during the week ended July 24. The reserves grew to $522.63 billion from $517.637 billion.

India's forex reserves comprise foreign currency assets (FCAs), gold reserves, special drawing rights (SDRs) and the RBI's position with the International Monetary Fund (IMF).

According to Sajal Gupta, Head, Forex and Rates, Edelweiss Securities, "The market shall be watching the RBI commentary on monetary policy. MPC is expected to be dovish and growth supporting. Break below 74.50 would only give further direction to the market."

Last Friday, the rupee marginally appreciated to 74.81 against a greenback.

"We expect a rate cut of at least 25 bps to support the slowing growth," said Rahul Gupta, Head of Research-Currency, Emkay Global Financial Services.

"This may give a boost to risk appetite and weigh on the USD-INR spot. Although the spot has not broken the crucial support of 74.50, unless it falls below that, we expect the spot to remain afloat. The trend for the next week will continue to be sideways with bearish bias between 74.50 and 75.10," Gupta added..