Mumbai: In highly volatile trade, the rupee on Thursday continued its north-bound journey and appreciated by another 14 paise to close at an eight-year high of 42.90/92 against the US currency on account of heavy dollar selling by some banks towards the close of business hours.
In a topsy-turvy trade at the Interbank Foreign Exchange (Forex) market, the Indian unit opened better at 42.99/43.01 a dollar from Wednesday’s close of 43.04/06. It fell back to Rs43.21 in intra-day trade due to good dollar buying by oil refineries and importers.
Suddenly towards the fag-end, heavy dollar selling by some multinational as well as state-run banks helped the rupee to recover sharply to close at 42.90/92 a dollar, registering a steep rise of 14 paise over the previous close.
Completing a straight four-session winning streak, the rupee flared up by a whopping 84 paise or 1.92%.
On Wednesday, the rupee had reached 42.84 against the greenback in intra-day trade.
To contain inflation and credit growth, the Reserve Bank of India (RBI) on 30 March unexpectedly hiked its key interest rates to suck excess liquidity from the banking system.
The urgency of banks to sell dollars to generate funds to meet statutory requirements helped the rupee to close below the 43-mark, forex dealers said, adding “we are keeping an eye on the possibility of intervention of the central bank, which is sitting on the fence and watching rupee movement”.
“The rupee is still in a strengthening mode, and it will remain so as long as capital inflows continue,” said Parthasarathi Mukherjee, treasurer at UTI Bank in Mumbai. “We are seeing various types of flows, such as portfolio investments, direct investment and overseas borrowings.”
The rupee’s 4.1% gain in the month through Thursday is the third-biggest advance among Asia-Pacific currencies during that period.
Volatility on one-month rupee options reached the highest in more than eight months as traders bought protection on a further advance in the currency after it rose to the strongest since June 1999 on Wednesday.
India’s current account deficit declined to $3.04 billion (around Rs13,000 crore) in the quarter through December from $4.78 billion in the previous quarter as net capital inflows rose to $10.7 billion in the quarter from $359 million a year earlier.
Overseas funds bought local equities worth an average $63.3 million a day in the two weeks through 30 March, after making daily average sales of $22.7 million in the previous two weeks, according to data released by the Securities & Exchange Board of India.
Direct investment inflows rose to $4.9 billion in the quarter through December from $2.7 billion in the previous quarter, according to latest government data.
Asia’s fourth-largest economy probably accelerated for a third year to grow 9.2% in the year ended 31 March, according to the government. It grew 9% the previous year and 7.5% the year before.
The rupee pared gains on speculation that RBI will sell it to protect exporters after the currency gained for five straight weeks.
RBI will probably sell rupees in the next few weeks when debt sales and an increase in banks’ cash reserves drain money from the banking system, said V. Ravi Kumar, director of treasury at Infrastructure Development Finance Corp. in Mumbai.
“The recent gain may have resulted from a change of policy at RBI, which probably decided not to intervene at a time when cash is plenty in the banking system, so as not to stoke inflation,” Kumar said. “One would expect the central bank to buy dollars in the next few weeks when the liquidity will come under pressure due to auctions and the cash reserve increase.”
The local currency may drop as low as 43.70 in the coming weeks if the central bank starts selling, Kumar said.
RBI has frequently sold rupees in the past to protect exporters. Rupee gains make Indian goods and services costlier in the global market, eroding exporter competitiveness.
The bank may resume such sales later this month as cash in banking system declines. The government will raise as much as Rs1.6 lakh crore by selling bonds this month. Also, lenders must raise the amount of cash kept aside as reserves by 0.5 percentage point to 6.5% of deposits by 28 April to meet new regulations, effectively draining Rs1.55 lakh crore from the banking system.
(Anil Varma of Bloomberg contributed to the story.)