Rupee turns soft ahead of RBI policy meet, down 5 paise

Overall, forex market sentiment turned little nervous and witnessed lethargic trade as currency traders preferred to stay on the side-lines ahead of the RBI's bi-monthly policy outcome.

The Indian currency hovered near a fresh one-month high in early trade, breaching the significant 66-level briefly against the US currency before retreating sharply.

It swung between a high of 66.84 and a low of 67.17 during the day.

Heavy sell-offs in local equities along with massive capital outflows further added to the volatility.

"Indian rupee fluctuated as the investors kept their eyes on the RBI's second bi-monthly monetary policy meeting that began today. While timely onset of monsoon has brought in cheers, firm oil has raised expectations of rate hike. Meanwhile, USD has also gained traction on the back of a better-than-expected jobs reports that fuelled the hopes of more rate hike in the current year by FOMC," Anand James, chief market strategist at Geojit Financial Services, said.

The Indian currency had a rather insignificant May month and witnessed implied volatility to breach the significant 68-mark as crude oil price upswing threatens to worsen the outlook for the country's current account deficit. 

Extreme currency volatility should be expected in the current environment of enhanced uncertainties about the economy and policy, a forex dealer commented.

At the inter-bank foreign exchange (forex) market, the rupee opened higher at 66.96 against the weekend close of 67.06 on sustained dollar selling by exporters and corporates.

Maintaining its strong undertone, it later touched a fresh one-month high of 66.84 before wiping out gains due to bouts of dollar demand.

After hitting a low of 67.17 in later afternoon deals, the rupee ended at 67.11, revealing a loss of 5 paise, or 0.07 per cent against the USD.

The RBI, meanwhile, fixed the reference rate for the dollar at 67.0543 and for the euro at 78.3597. 

Meanwhile, the RBI's Monetary Policy Committee (MPC) began its three-day meeting amid speculations that key interest rate may be hiked for the first time after four-and-a-half years on the grim backdrop of surging crude prices.

The Reserve Bank advanced the MPC meet by a day to June 4 and also increased the duration to three days due to "certain administrative exigencies".

"Owing to certain administrative exigencies, the second bi-monthly MPC meeting for 2018-19 will now be held on June 4-6, 2018 instead of on June 5-6," the RBI had said. 

The apex bank, in its last monetary policy, projected lower inflationary forecast at 4.7-5.1 per cent for the first half of the fiscal.

Last week, India reported a stellar 7.7 annual per cent growth for the quarter ended March 31, 2018.

On the energy front, crude traded little changed as US production hit a record-high and reports that OPEC members considered boosting supply to balance rising global demand.

Brent crude futures, an international benchmark, is trading sharply down at USD 76.04 a barrel, in early Asian trade.

In the meantime, the 10-year benchmark bond yield rose to 7.88 per cent from 7.85 per cent.

Globally, the dollar trade lower against its major rivals undermined by Trumps interventionist and protectionism activity make the outlook for global trade darker with the US President imposing tariffs.

The dollar index, which measures the greenback's value against a basket of six major currencies was down at 93.68.

In the cross-currency trade, the rupee also drifted back against the pound sterling to finish at 89.79 per pound from 89.34 and also dropped against the euro to close at 78.69 as compared to 78.41 last Friday.

The home currency, however remained firm against the Japanese yen to end at 61.28 per 100 yens from 61.35 earlier. 

Elsewhere, the euro staged a strong recovery against the greenback on easing political uncertainties after a new government in Italy was sworn in on Friday despite sluggish macro data.

The British pound, however, is trading up against the US Dollar after the UK construction PMI reached 52.5 in May unchanged from the previous month.

In forward market today, premium for dollar showed a steady trend owing to lack of market moving factors.

The benchmark six-month forward premium payable in October and the far-forward April 2019 contract both ended virtually unchanged at 112-114 paise and 251-253 paise, respectively.