By Sam Nagarajan, Bloomberg
MUMBAI: Rupee may gain a second week on speculation some lenders will sell dollars to raise cash before a scheduled tax payment drains funds from the banking system, a survey of traders showed.
The local currency may test a week’s high as supply dwindles with an outflow of as much as Rs400 billion in advance taxes by companies on 15 March. The rupee last week snapped two weeks of losses as the benchmark stock index halted three weeks of declines.
“With so much money going out, not a lot of traders will stay long in dollars,” said Sudarshan Bhatt, chief currency trader at state-owned Corporation Bank in Mumbai. “A perceived shortfall in supply could push the rupee up.”
The rupee may climb to as high as 44.15 against the dollar this week, from last week’s close of 44.235, according to the median estimate of 10 traders .
The central bank’s step to remove Rs60 billion of surplus cash this week through the sale of bonds and bills may also exacerbate the shortfall in the local currency. The federal government on 9 March sold Rs70 billion of bonds as part of its annual borrowing program.
The rupee had the biggest two-day gain in two weeks following the Reserve Bank of India’s decision on 13 February to raise the amount of cash lenders must set aside to cover deposits by half a percentage point. The move drained as much as Rs140 billion.
Sensex, Central Bank
The currency’s advance may be curbed by speculation the central bank will stem gains to prevent a stronger rupee from hurting exporters. Sales of equities by global funds on falling stocks may also fuel the pace of the currency’s decline.
“Gains will be capped as there’s always the fear of the central bank stepping in,” said Tarini Vaidya, treasurer at Mumbai-based Centurion Bank of Punjab Ltd. “We’ve seen the rupee swing along with the stock index, and further correction could potentially take the rupee all the way down to 44.75.”
The rupee failed to break beyond 44.025 against the dollar last month, a one-year intraday high, as data showed the central bank stepped up purchases of dollars.
Foreign-exchange reserves rose $14.51 billion in the four weeks through March 2, compared with $5 billion in dollar purchases by the central bank in all of November and December, the latest data provided by the monetary authority show.
The benchmark Bombay Stock Exchange Sensitive Index of equities, or Sensex, has recovered almost 4 % of a 15 % drop from last month’s record high. It climbed 3.7 % on March 8, the most in eight months, helping the rupee recover from a 10-week low.
Overseas investors sold $776 million of Indian shares more than they bought in the past two weeks through March 8, compared with a net purchase of $1.25 billion in the prior two weeks, according to data provided by the Securities & Exchange Board of India.
The rupee also may decline on speculation some importers will stock up dollars, betting the rupee is approaching a peak. Demand for dollars from companies scheduled to pay interest on their overseas loans may also pull the currency down, said Vikas Babu, a trader at state-owned Andhra Bank in Mumbai.
“The rupee can only get weaker as there’ll be demand for dollars from importers and some companies with payments due,” said Babu, who expects the currency to fall to as low as 44.60 this week.
It may trade in a range of 44.15 and 44.60 this week, the survey showed.
A stronger currency helps companies, including Indian Oil Corp., the country’s biggest refiner that depends on imported crude oil, by cutting the cost of shipments from overseas.
Exporters, including Infosys Technologies Ltd., the country’s second-biggest software maker, may take advantage of any drop in the rupee to exchange their overseas earnings, said R. Hariharan, chief currency trader at state-owned Central Bank of India in Mumbai. The rupee may trade between 44.25 and 44.42, he said.
The rupee weakened in the forwards market last week as some investors sold dollars in the cash market and bought 1-year forward contracts. The premium for a one-year dollar forward rose to 3 %, from 2.82 at the beginning of the week, Bloomberg data show.