Mumbai: The rupee rose to its highest close in three weeks on Wednesday as tax payments squeezed cash supplies and as investors hoped a rising stock market would rekindle foreign investor interest for local assets.
But looming national elections, a widening fiscal deficit and slowing growth remain weights for currency, which hit a record low of Rs52.20 per dollar in early March.
The partially convertible rupee ended at Rs51.29/30 per dollar, 0.35% above Tuesday’s close of Rs51.47/4850, its highest finish since 27 February when it ended at Rs51.10/12.
It is still down 0.4% so far this month, and 5% so far in 2009. It shed nearly a fifth of its value last year.
“There is some sort of a shortage of rupee funds in the market due to the tax outflows. That is driving the rupee up and we may see Rs50.75 per dollar being tested in the near term,” said Sudarshana Bhat, chief currency trader with state-run Corporation Bank.
One-month offshore non-deliverable forwards were quoting at Rs51.62/51.72.
Quarterly corporate tax payments have squeezed funds in the money markets, sending overnight rates to two-month peaks of around 4.5% and reducing the amount of funds the Reserve Bank of India absorbs at its daily money market operations.
The rupee has also found support from recent gains in the stock market, which rose 1.3% on Wednesday to its strongest close in a month. The market has risen 10% since 9 March, when it had ended at its lowest in more than 3 years.
Citigroup analysts say the rupee’s fall in 2008 and 2009 has been mainly due to foreigners selling out of local shares. On a year-to-date basis, portfolio outflows totalled $12.3 billion compared to inflows of $12.5 billion a year earlier, they said.
“While fundamentals support a stable rupee, in the near term, rising risk aversion and continued de-leveraging could result in a temporary overshoot,” they said in a note.