Mumbai: The Indian rupee rose to a fresh three-week high on Thursday as banks liquidated dollar holdings amid tight cash conditions in the money market, and buoyed by firmer stock markets.
At 11 a.m., the partially convertible rupee was at 42.695/700 per dollar, 0.1% stronger than Wednesday’s close of 42.73/74. The rupee has risen 0.6% this week but is down 7.7% in 2008.
“It is very difficult to hold on to a long dollar position with call rates at almost 9%,” a senior dealer with a private bank said.
Overnight cash rates a barometer of cash supplies in the inter-bank money market were at 8.50/8.75%, compared with 6% when cash is adequate.
The rupee was also underpinned by a hefty half percentage point increase in interest rates by central bank on Tuesday to rein in galloping inflation. It was the second rate rise this month.
Traders said annual inflation, which hit a 13-year high in early June above 11%, was expected to stay in double digits for some time.
“With this kind of inflation and repeated rate hikes in the country, there is expectation the rupee may not weaken more than 43 per dollar,” the trader at the private bank said.
Dealers said they expected dollar supplies would be higher than demand, helping the rupee to trade in a band of 42.65 to 42.75 through the rest of the session.
Traders were also watching the stock market to gauge fund flows. Foreign institutional investors have been net sellers of $6.2 billion of Indian shares so far this year, after having bought $17.4 billion in 2007.
India’s main share index was up 1% in the morning but is down more than 29% so far in 2008.