Mumbai: A sharp rebound in local shares amid recovering global appetite for risk and some dollar inflows lifted the rupee on Wednesday, even though its outlook remains bearish.
Traders said recent measures spelt out by the central bank to shore up the local unit helped, but the comfort looked short-lived with slowing growth and widening trade deficit in Asia’s third-largest economy weighing.
The rupee ended at 52.49/50 to the dollar, 0.7% stronger from Tuesday’s close of 52.87/88, after moving in a 52.44-52.80 percent range.
“There were custodial flows seen today. Also, equities are on the positive side, which is helping the rupee,” said Vikas Babu, a forex trader at state-run Andhra Bank.
Indian shares gained 3.4% on Wednesday to their highest close since 29 August, ending their 5-day losing streak, bolstered by bargain buying and firm global markets, although investor confidence remained frayed over slowing domestic growth and policy inaction.
Traders said comments by a senior government official indicating the government was looking at all options to attract foreign capital inflows also helped the local unit.
“The market is in a selling mode as it expects the RBI to take more steps to prevent the rupee from weakening,” a dealer with another state-run bank said.
Subir Gokarn, a deputy governor at the Reserve Bank of India, said on Tuesday the central bank would use other measures to bring stability to the foreign exchange market.
For details on steps taken by the RBI to curb the rupee’s volatility and increase inflows, see:
“But I see a huge demand-supply mismatch, even in the near-future, because of the trade deficit,” the dealer with the state-run bank said.
India’s trade deficit for the fiscal year ending March 2012 is expected to sharply widen to $155-$160 billion from $104.4 billion a year ago, posing further downside risks to the weak currency.
The rupee is being pressured by the country’s large deficit and other macroeconomic fundamentals, K.C. Chakrabarty, a deputy governor of the central bank, said on Tuesday.
“With FII interests proving fickle (despite the favourable rate differential story) and FDI interests likely to be disenchanted by the slow-moving reforms agenda, funding the current account deficit will prove to be an uphill task in the year ahead,” said Radhika Rao, economist at Forecast PTE.
European stocks rallied and the euro was well bid on Wednesday as investors priced in an improvement in the economic outlook and looked forward to a big take up by banks of the European Central Bank’s first-ever offer of three-year loans.
One-month offshore non-deliverable forward contracts were quoted at 53.93, indicating more short-term weakness in the onshore spot rate.
In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange were around 52.7, with total volume at $4.6 billion.