Mumbai: The rupee retreated from one-and-half week highs on Thursday as sharp losses in local shares raised worries over sustained foreign fund outflows, while defence-related dollar demand also weighed.
The partially convertible rupee closed at Rs 45.24/25 per dollar, 0.2% below its 45.13/14 close on Wednesday. The rupee rose as much as 45.04, its strongest since 4 January, in early trade.
“What we saw in the forex market today was a direct reflection of the weakness in the stock market,” said Ashutosh Khajuria, head of treasury at IDBI Bank.
“In the near term, at least until March, the rupee will continue to be under pressure as flows have slowed down and we need capital inflows to fund the current account deficit. So I see the rupee around 45.75 in three-months’ time.”
Traders said there were some debt-related dollar inflows in early trade which had pushed up the rupee to the day’s high, but defence-related dollar demand later weighed.
Foreign institutional investor (FII) limits in government and corporate debt, which were increased by $5 billion each to $10 billion and $20 billion, were allotted in December.
“There were some defence-related dollar purchases in the morning, lots of buying by state-run banks. Then, equity market started falling. There were not many major flows on either sides,” said the chief forex dealer with a foreign bank.
Dealers said dollar demand from oil importers also weighed. Oil is India’s biggest import and refiners are the largest buyers of dollars in the domestic currency market. Oil-related dollar demand has risen due to high global oil prices.
“The euro came down from its day’s high and the fall was reflected in the rupee’s weakness in late trade as well,” said A. Ajith Kumar, a foreign exchange dealer with Federal Bank.
The euro was trading at $1.3138 when the rupee market closed, after having risen as high as $1.3170 earlier in the day. The index of the dollar against six major currencies was flat at 80.035 points.
Traders would continue to watch shares for fund flow cues. Foreign funds are net sellers of $520 million worth of shares this year until Wednesday, pushing the rupee down 1.2% In 2010, record inflows of $29.3 billion had helped the rupee gain 4.1%.
Shares fell for the seventh day in eight sessions, with disappointing results from software services bellwether Infosys Technologies adding to investor gloom over rising prices and the prospect of tighter monetary policy.
Food inflation in the world’s second-fastest growing major economy eased marginally from a one-year peak in early January, but remained high enough to keep pressure on annual headline inflation in December and reinforce expectations of an interest rate rise this month.
The headline inflation data due on Friday at around 12:00pm, would be watched for clues on likely rate action at the central bank’s policy review on 25 January.
One-month offshore non-deliverable forward contracts were quoted at 45.53, weaker than the onshore spot rate.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX both closed at 45.2525, while those on the United Stock Exchange ended at 45.25, with the total traded volume on the three exchanges at about $5.4 billion.