Mumbai: The Indian rupee dropped to a one-week low late on Monday as share losses and the dollar’s gains versus major currencies offset the positive sentiment post the Reserve Bank of India’s surprise rate hike late on Friday.
The partially convertible rupee closed at Rs45.59/60 per dollar, after touching Rs45.5975, its weakest since 15 March and 0.2% below its Friday’s close of Rs45.50/51. The unit traded in a band of Rs45.4775-45.5975.
The central bank raised rates late on Friday in its first increase since it began cutting in 2008, citing intensifying inflationary pressures and a steady economic recovery.
Though the rupee weakened on the day, most traders and analysts said the rate hike should help the rupee in the medium term as it would attract foreign fund inflows which are a key support for the rupee.
“A rate hike had mostly been priced in by the market so not much of a reaction seen. But since stocks fell, the rupee also weakened. There was good two-way demand holding it in a range today,” said Sudarshana Bhat, head of foreign exchange trading, at state-run Corporation Bank.
Indian shares snapped a four-day winning streak and dropped nearly 1% weighed down by rate hike, with financials leading the decline.
Foreign fund flows are a crucial determinant of the rupee’s fortunes. Foreigners have so far in 2010 bought shares worth a net $3.5 billion, adding to record inflows of $17.5 billion seen in 2009.
“The rupee is likely to be slightly weak in the near term due to month-end demand and some unwinding of offshore positions but bullish outlook for the rupee remains intact in the medium term. It could first rise to 45.20 and then gain beyond,” Bhat added.
The index of the dollar against six major currencies was up 0.2%.
The euro slumped to a three-week low against the dollar on Monday, pressured by uncertainty about whether Greece would be able to secure aid this week to help service its ballooning debts.
One-month offshore non-deliverable forward contracts were at 45.69, weaker than the onshore spot rate. The one-year onshore dollar premium edged as high as 136 points from 129.50 points at close on Friday.
“Premiums opened with a gap today due to the rate hike. We are still at a high yield so don’t see much of a higher rally but we won’t go much lower down in March,” said Nitesh Kumar, an inter-bank dealer, with Development Credit Bank.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX both closed at 45.5475, with the total traded volume on the two exchanges at nearly $6 billion.