Rupee on a downslide

The spot rupee today reached a fresh 13-month, intra-day low of 43.20 against the dollar following heavy buying of the US currency by oil companies and by banks for non-deliverable forward (NDF) market arbitrage.

The rupee, however, recovered to close stronger at 42.97 following selling of dollars by the Reserve Bank of India (RBI) as a part of the indirect intervention to stem the rupee depreciation, dealers said. Since the beginning of the month, the rupee has lost almost 7.5 per cent from 40.00 to a dollar to 42.96.

RBI had last sold dollars before the announcement of the annual monetary policy on April 29, 2008, to keep the rupee in the range of 39.90-40.00 to a dollar. "But for the selling of dollars by nationalised banks on behalf of the central bank to the tune of around $500-750 million, the rupee would have easily breached 43.30-43.40 to a dollar," said a dealer.

Dealers added that the selling happened around 43.20 in the spot dollar market and there was not much sales in the forward market.

"This is one of the reasons for the enhanced liquidity in the market, which is evident through a rise in reverse repo bids from around Rs 20,000 crore last week to Rs 36,000 crore on Thursday," said a dealer.

Since crude oil prices reached a high of nearly $136 a barrel in the international markets, the rupee opened weaker at 42.98-43 after closing on Wednesday at 42.85-86 to a dollar. The outlook on the Indian economy has been benign and there are no fresh inflows, while the demand has led importers, both oil and non-oil, to buy dollars aggressively, a dealer of a private bank said.

NDF is the derivatives market, where foreign investors take a position on the rupee-dollar exchange rate in the overseas market.

At present, the view on the rupee is bearish, which may lead to the purchase of dollars in the local market to be invested overseas. These markets mostly operate in Singapore and Hong Kong and banks or companies with active subsidiaries or branches in these countries play in the market.

Banks in India are buying dollars cheaper by 3-4 paise in the one- or two-month forward to sell it at a higher spread in the overseas market and earn profit.

Following a panic buying of dollars by oil companies, which preferred to book long-term contracts rather than the short-term ones, the annualised premia for the six-month and one-year forward dollars closed higher at 1.89 per cent and 1.39 per cent against 1.71 per cent and 1.30 per cent on Wednesday.