The RBI is seen comfortable with the rupee ranging anywhere in between 65-66.60 to a US dollar.
The Bihar poll outcome and heightened chances of a US rate hike are expected to flare up volatility in rupee value in the week starting November 8, experts said today.
"Bihar poll results will be the determining factor that drives the rupee's trajectory in the short term, especially for the upcoming week," Anindya Banerjee, associate vice president for currency derivatives with Kotak Securities, told IANS.
The Bihar elections results will be out on November 8. On Thursday, four out of six exit polls predicted a victory for the Nitish Kumar-led 'Grand Alliance', while two polls showed the Bharatiya Janata Party (BJP)-led NDA in the lead.
"A win for the National Democratic Alliance (NDA) government will help in arresting the fall in the rupee value and might even revive it," Mr Banerjee said.
According to Mr Banerjee, a win for the Janata Dal (United) alliance will put further pressure on the rupee value which will be impacted by a cascading effect from falling equities and bond markets.
"The rupee might even breach the 67 to a US dollar mark, if there is a JDU win. At that point the Reserve Bank of India (RBI) will certainly intervene to arrest the fall in the rupee value," Mr Banerjee elaborated.
The Bihar polls are seen as a crucial test for the incumbent central government's popularity with the masses. Especially, after it failed to pass key economic reforms so far in its short tenure.
Besides the central government, the period after the polls will be crucial for the RBI as it will keep a close watch over the rupee's movement.
The RBI is seen comfortable with the rupee ranging anywhere in between 65-66.60 to a US dollar. Anything beyond or below the limit provokes the central bank to intervene by either buying or selling the greenback.
Hiren Sharma, senior vice president, currency advisory at Anand Rathi Financial Services, told IANS that the heightened chances of US Federal Reserve (US Fed) raising interest rates in December may negatively impact the rupee value.
"Rupee has been following weaker domestic equities, and fundamentally too - with a possible December rate hike by the US Fed - global and domestic equities can perhaps continue to remain weak," Mr Sharma said.
"Parallely, there can be an immediate pull-back domestically, if the present government gets a majority in Bihar election results. Else a weaker bias will continue."
The US Fed did not raise interest rates from near zero levels that it has maintained for a decade or so, during its Federal Open Market Committee (FOMC) held in October.
However, fears of the US Fed raising rates in December due to stronger economic data and comments from the US central banks' have spooked global investors.
A hike in interest rates by the US Fed will send shock waves across the world's capital markets.
A rate hike could potentially lead to massive amounts of pull-back of foreign funds from emerging economies like India. The US dollar will also strengthen against emerging market currencies, gold and other asset classes.
It is also expected to dent business margins, as access to capital from the US will become expensive.
Notwithstanding the fears of a further downward trajectory, the rupee can rely on the fact that a victory for the incumbent central government may provide the much needed relief to the Indian currency, which has been underperforming its peers.
The rupee has been on a downward trajectory. On a weekly basis, the rupee weakened by 49 paise to 65.76 to a US dollar (November 6) from its previous close of 65.27 to a greenback (October 30).
On a day-to-day basis, the rupee closed Friday's trade weaker at 65.76 to a US dollar from its previous day's close of 65.75 to a greenback.
The data with the National Securities Depository Limited (NSDL), showed that the FPIs (Foreign Portfolio Investors) sold Rs 2,455.83 crore or $376.63 million in equity and debt markets from November 2-6.
The data with stock exchanges showed that the FPIs sold stocks worth Rs 1,462.05 crore in the period under review.