Steepest rate cut in 5 years boosts rupee, ends higher at 85.62

Mumbai: Rupee strengthened modestly on Friday as the Reserve Bank of India's (RBI) steepest rate cut in five years boosted local equities, helping the currency eke out a gain even as the dollar firmed against major peers.

The rupee closed at 85.6250 against the dollar, up from 85.79 in the previous session. However, it declined 0.2 per cent for the week.

RBI cut its key repo rate by 50 basis points on Friday and slashed the cash reserve ratio (CRR) for banks, as low inflation allowed policymakers to focus on supporting growth.

India's benchmark equity indexes, the BSE Sensex and Nifty 50, rose about 1 per cent each on Friday, posting their best one-day gain in two weeks as the rate cut fuelled domestic growth expectations.

India's benchmark 10-year bond whipsawed between gains and losses as traders digested the central bank's policy moves, including a shift in stance from 'accommodative' to 'neutral.'

The yield on the benchmark paper was last quoted a tad higher at 6.2237 per cent  Meanwhile, dollar-rupee forward premiums fell in reaction to the rate cut with the one-year implied yield dropping 10 basis points to 1.81 per cent.

The Indian central bank's "larger-than-expected 50 bps rate cut and 100 bps cut in the cash reserve ratio should support INR," DBS said in a Friday note.

"We will consider lowering USD/INR’s forecast if the US Federal Reserve pivots towards a rate cut later this year and sets the stage for more US dollar weakness," the noted added.

On the day, the dollar index was up 0.3 per cent at 98.9 in the run-up to the release of closely watched US non-farm payrolls data, which will offer cues on how the world's largest economy is faring in the face of trade policy-sparked uncertainty.