Mumbai: The rupee snapped a four-day decline on speculation that banks will buy the currency to raise cash as they avoid costlier money market borrowing. It gained as banks probably exchanged dollars to meet their cash needs after the overnight borrowing rate rose to the highest in six weeks. Lenders in India have to set aside cash equivalent to 6.5% of their deposits as reserves.
“Banks are selling dollars to raise cash as call rates are high and this has helped the rupee,” said Sudarshan Bhatt, chief currency trader at India’s state-owned Corporation Bank in Mumbai. “The rupee may gain in the next couple of days because banks’ demand for funds typically rises before the end of a quarter.”
The rupee rose 0.4% to 40.83 against the dollar as of the 5pm close in Mumbai, according to data compiled by Bloomberg. The 8.4% advance this year is the third-biggest among Asia-Pacific currencies.
The overnight money market rate rose for the fourth day to 8.13% on Thursday, the highest since 17 May, according to Bloomberg data. The rate was 0.2% a week ago. It rose after companies paid quarterly taxes and the government increased debt sales this month.
The government sold bonds and treasury bills worth a total Rs55,000 crore this month, compared with Rs44,500 crore last month. The shortage of funds spurred lenders to borrow from the central bank for the first time since 25 May.
Banks borrowed a net of Rs9,500 crore from the Reserve Bank of India on Thursdayvia its daily repurchaseagreement auctions.
The rupee’s gains were limited on expectations that the Federal Reserve will reiterate its concerns about inflation at a meeting on Thursday, causing US bond yields to rise and spurring investors to slow emerging market investment.
“A hawkish policy statement by the Fed could lead to appreciation of the dollar against major currencies,” said Namrata Padhye, analyst at IDBI Capital Market Services Ltd in a report. “The sentiment on the rupee could worsen in case of considerable strengthening of the dollar globally.”