Rupee falls on weaker shares; global risk eyed

The rupee fell for the seventh session in nine on Monday, tracking declines in domestic shares after data showing steady core inflation cast doubts about whether the Reserve Bank of India (RBI) will lower interest rates this month.

India said headline wholesale price inflation slowed to its lowest level in five months in June, but core inflation was estimated to have risen 4.85% from a year ago, steady from levels in May.

Though bond yields dropped on the headline inflation fall, traders appeared split about whether the RBI will cut interest rates at its July 31 policy review, especially since lower-than-expected rainfalls during the monsoon season raise worries about higher food prices.

The rupee had slumped late last month to a record low against the dollar because of concerns about India's fiscal and economic outlooks, and a rate cut from the RBI would help improve sentiment.

"Any sign that inflation pressures are easing in India is welcome by the market, as in theory at least, it gives the RBI more room to potentially cut rates in the period ahead," said Jonathan Cavenagh, a senior forex strategist with Westpac in Singapore.

The partially convertible rupee ended at 55.31-32 per dollar as per the SBI closing rate versus its previous close of 55.14-15 on Friday.

The local unit had started stronger, but retreated as domestic equities faltered, with the BSE Sensex falling 0.6%.

Traders said the losses in the euro on continued concerns about euro zone debt and high peripheral bond yields, also hurt demand for risk.

With two weeks to go until the RBI review, FX markets are likely to take their cues from global risk factors.

Investors are also eyeing the presidential elections on July 19, given widespread expectations the government plans to revive long stalled policy reforms soon after.

The one-month offshore non-deliverable forwards were trading at 55.46 versus 55.22 previously.

In the currency futures market, the most traded near-month contracts on the National Stock Exchange, MCX-SX and United Stock Exchange all closed around 55.3550 with the total volume at around USD 5.6 billion.