The rupee, which is now Asia's worst-performing tender and has lost around 14 percent of its value against the USA dollar this year, has been under pressure from rising oil prices and higher United States interest rates.
The Sensex tanked 792.17 points or 2.25 per cent to close at a near 6-month low of 34,376.99, while the Nifty slumped 282.80 points or 2.67 per cent to 10,316.45.
The repo rate, at which the RBI lends to the system, will continue to be at 6.5 per cent and the reverse repo at which it absorbs excess funds will be 6.25 per cent.
After two successive hikes, the repo rate now stands at 6.50 per cent.
"Given the sell-off in the domestic equities and higher crude oil prices, the rupee is now expected to move towards 75-76 levels in next couple of sessions", said Rushabh Maru - Research Analyst, Anand Rathi Shares and Stock Brokers. The currency pared some losses to touch a high of 72.90 per dollar on market speculation that RBI may open special dollar window for oil companies.
Mumbai: The Reserve Bank of India is widely expected to increase its repurchase rate by 25 basis points (bps) when it unveils the monetary policy on Friday, as it seeks to curb the potential inflationary impact from rising crude oil prices and a weakening currency.
The markets were expecting the RBI's six-member Monetary Policy Committee (MPC) to raise the interest rate but the MPC changed its monetary policy stance to "calibrated tightening" of the interest rate cycle from "neutral", indicating that rates could go up in the future.
The rupee, which is the worst-performing major currency is Asia, has dropped about 7 per cent since August when the RBI last raised rates. Surge in the worldwide prices of crude oil has been the major party spoiler; per barrel cost of crude has surpassed $80, making it costly for importing, thus leading heavy depreciation in the Indian currency.
Foreign institutional investors remained net sellers, offloading equities worth Rs 3,370.14 crore Friday, provisional data showed.
Markets were caught off guard as the Reserve Bank maintained status quo on the benchmark interest rate.
Earlier in the day, while announcing its monetary policy, the RBI kept its lending rates unchanged. This seems to be a hard time for the central bank, as on one hand, the fall in the rupee's value and rise in crude oil prices are feeding inflation, on the other, the IL&FS crisis and tightening liquidity in the money market are raising financial stability concerns.
"The unchanged decision suggests that the RBI is not overly concerned about rupee depreciation", said Mitul Kotecha, a senior emerging-markets strategist at TD Securities in Singapore. The RBI doesn't have any target or band in mind and acts only to manage volatility.