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Rupee strengthens as banks sell dollars to meet RBI requirements

Rupee strengthens as banks sell dollars to meet RBI requirements
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First Published: Tue, Apr 03 2007. 10 47 PM IST
Updated: Tue, Apr 03 2007. 10 47 PM IST
Mumbai: India’s rupee rose, the biggest fluctuation of any currency on 3 April, as lenders sell dollars to meet new reserve requirements from the central bank.
The rupee approached the strongest since June 1999 after the Reserve Bank of India (RBI) increased the amount of funds banks must set aside for the third time in as many months.
Policymakers are striving to rein in inflation from the highest in two years. Overnight interest rates at a decade high are discouraging banks from borrowing rupees in the money market.
“Selling dollars is a preferred option since the cost of rupee resources is high and difficult,” Rohan Lasrado, a currency trader at HDFC Bank Ltd, said. “The rupee may gain further as liquidity tightness doesn’t appear to be easing anytime soon.” The rupee surged 1% to 43.075 against the dollar as of the 5pm close in Mumbai, according to data compiled by Bloomberg. The gain was the highest since 2 June. The currency climbed to 43.05, near the 43.025 reached on 28 March, which was the strongest since 10 June 1999.
Tuesday was the first day of trading since the rate increase as bond and currency markets were closed on Monday.
Lenders will have to set aside 6.5% of their deposits in cash starting 14 April, compared with 6% at present, RBI said after markets closed 30 March. The measure will drain Rs15,500 crore from the banking system, the central bank said.
The monetary authority also increased the rate at which it lends to banks overnight by a quarter percentage point to 7.75%, to curb loan growth that has fuelled inflation.
Call reverse
Goldman Sachs Group Inc., the world’s biggest securities firm by market value, reversed its previous call for the rupee to weaken after the unexpected rate increases.
“We expect the rupee to benefit both from rising rates and the shift in the policy focus of the central bank,” the Goldman strategists wrote in a note to their clients. RBI’s focus on inflation is “implying that it may be willing to tolerate a higher rupee”.
Goldman recommended buying the Indian currency on speculation that rising interest rates will make it more attractive for domestic companies to borrow abroad and convert the proceeds into rupees.
Volatility on one-month rupee options was held near the highest this year as traders bought protection on a further advance in the currency.
Crude oil
The gains in the rupee were moderated by speculation that the rise in crude prices will prompt importers such as Indian Oil Corp., the nation’s largest refiner, to buy dollars.
“The rupee’s rise provides an opportunity for refiners to buy dollars given that crude is becoming more expensive,” said Paresh Nayar, head of bond and currency trading at Development Credit Bank Ltd in Mumbai. “There are more reasons for the rupee to decline now than we have seen in the recent past.” Strength in the rupee means less of the local currency has to be converted by importers. India imports three-quarters of its annual oil requirement.
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First Published: Tue, Apr 03 2007. 10 47 PM IST
More Topics: Money Matters | Currency |