By Subhadip Sircar
MUMBAI (Reuters) - The rupee fell on Monday as the RBI kept interest rates on hold and on caution ahead of the U.S. Federal Reserve's meeting later this week, although a lower-than-expected trade deficit helped to cap the currency's losses.
The Reserve Bank of India kept its repo rate steady, warning of upwards risks to inflation and global economic uncertainty, in a decision that had been widely expected. A rate cut benefits the rupee by increasing confidence on the economic outlook and sparks hopes of more foreign inflows.
Dealers said the rupee was helped by the central bank's concern that a falling currency would feed into imported inflation, comments that suggested it would not tolerate large rupee weakness.
Investors said a potentially bigger event would be the Fed's meeting ending on Wednesday after a recent sell-off in emerging markets helped send the rupee to a record low of 58.98 last week.
"The policy was largely a non-event. The market is now focusing on the FOMC. However, I feel the rupee is steadying as arbitrage with offshore has reduced and may strengthen in the later part of week," said Satyajit Kanjilal, chief executive at ForexServe.
The partially convertible rupee closed at 57.87/88 per dollar compared with 57.5150/5250 on Friday, its second session of fall in three. It fell to 57.90 in session.
Foreigners have continued to be heavy sellers in Indian debt, pulling out over $4 billion since late May.
The currency managed to recover some losses after the May trade gap came in slightly below market estimates, although it still widened to a 7-month high in May as gold imports surged.
Economists expect newly announced measures to curb gold imports to dampen demand for the precious metal in coming months and narrow the shortfall.
In the offshore non-deliverable forwards, the one-month contract was at 58.20, while the three-month was at 58.81.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed around 57.97 with a total traded volume of $5.4 billion.
(Editing by Prateek Chatterjee)
