INDIA RUPEE-US tariff threat to keep rupee on the ropes ahead of RBI rate call

By Nimesh Vora

MUMBAI, August 6 (Reuters) - The Indian rupee is likely to remain under pressure ahead of the central bank's interest rate decision on Wednesday, after nearing an all-time low following President Donald Trump's fresh threats of steep tariffs on Indian goods.

The 1-month non-deliverable forward suggests the rupee INR=IN will open slightly weaker against the U.S. dollar from Tuesday’s level of 87.80.

The currency dropped as much as 87.8850 on Tuesday, just shy of its record low of 87.95 hit in February.

Bankers said the rupee avoided hitting a fresh lifetime low, thanks to likely dollar sales by the Reserve Bank of India through state-run banks. The central bank had to step in after the rupee slid following Trump's threat of substantial tariffs on Indian goods over Russian oil purchases.

"The RBI probably wanted to avoid headlines about the rupee hitting a new low on the same day Trump was ramping up tariffs," an FX trader at a private bank said.

"87.90–88 is the key zone to watch. If the RBI does cut rates today, we'll most likely break past that, and the central bank may allow some weakness."

About three-quarters of the 57 participants in a Reuters poll expect the RBI to leave the policy rate unchanged at 5.50%. The rest anticipate a 25-basis point cut, following a larger-than-expected 50-bp reduction in June.

Citibank, ANZ, DBS, State Bank of India and ICICI Bank are among those expecting a rate cut. At the previous policy, SBI was the only one to predict a 50-bps reduction.

Monetary policy operates with lags, and postponing a rate cut until inflation falls further or growth weakens more visibly could result in deeper and more persistent economic damage, SBI said in a note.

"We expect RBI to continue frontloading with a 25 bps cut in August policy."

KEY INDICATORS:

** One-month non-deliverable rupee INRNDFOR= forward at 87.94; onshore one-month forward premium at 11.25 paise

** Dollar index =USD up at 98.78

** Brent crude futures LCOc1 up 0.6% at $68.1 per barrel

** Ten-year U.S. note yield at 4.22%

** As per NSDL data, foreign investors sold a net $224.9 million worth of Indian shares on August 4

** NSDL data shows foreign investors bought a net $45.9 million worth of Indian bonds on August 4