Mumbai: The rupee was knocked down on Wednesday by central bank intervention, dealers said after it had initially rallied in expectation of more capital inflows after aggressive interest rate cuts by the U.S. Federal Reserve.
At 9:53 am (0423 GMT), the partially convertible rupee had softened to 39.53/54 per dollar from Tuesday’s close of 39.48/49, well below a high of 39.40 hit in opening deals.
“They came in aggressively minutes after the markets opened, and have bought heavily since then,” said a Mumbai-based dealer.
A surprise 75 basis point inter-meeting rate cut by the Fed has widened the interest rate differential between India and the US to 4.25%, which could attracting more capital inflows.
Capital inflows were a key driver of the rupee’s 12% rise in 2007, when foreigners bought a record $17.4 billion of stocks. The rupee hit a near-decade high of 39.16 hit in November.
But foreigners have turned sellers over the past week as the sharemarket has fallen sharply, removing a key support for the rupee.
Data shows they sold more than $2 billion worth of shares in the four trading days to Monday and provisional data from the National Stock Exchange showed foreign funds sold $1.08 billion of shares on Tuesday.
India’s benchmark share index ended down 5% on Tuesday, its lowest close since 21 September and 21% below a record high hit on 10 Janury.
Buoyed by the US rate cuts and gains in Asian markets, the market was up more than 4% in early deals on Tuesday.
The Reserve Bank of India bought $72.13 billion in the first 11 months of 2007, and traders said it has been active buyer since then to check the rupee.
Adding to the pressure on the rupee, importers were expected to be dollar buyers in coming days.
“Dollar demand will remain strong as we head into the month-end from oil refiners and other importers,” U. Venkataraman, head of treasury at IDBI Bank said.