Mumbai: India’s rupee declined, reversing gains earlier on 4 April 2007, on speculation that importers bought dollars after the local currency reached the highest level in eight years. The cash shortage in the banking system prompted sales of the US currency and helped the rupee strengthen beyond 43 to the dollar for the first time since June 1999.
That encouraged importers, such as refiners, to buy dollars as it meant they had to convert fewer rupees for their overseas payments. “We saw dollar-demand from refiners emerging after the rupee’s sharp appreciation,” said Pradeep Khanna, chief currency trader at HSBC Holdings Plc in Mumbai. “That may have also triggered banks, which had sold dollars earlier, to buy them back.”
The rupee fell to 43.0875 against the dollar as of the 5pm close in Mumbai on 4 April, from the previous close of 43.075, according to data compiled by Bloomberg. Earlier in the day, the currency rose to 42.8450, the highest since 7 June 1999.
India’s currency has advanced 2.7% in the past three months, the fourth-best in the Asia-Pacific region. The nation’s imports rose 25.1% to $14.36 billion in February, the commerce and industry ministry said on 2 April. Oil imports in the 11 months ended 28 February rose 32.5%, while non-oil imports rose 25.6%.
Asia’s fourth-largest economy meets three-quarters of its energy needs from abroad.
The rupee rose as banks sold dollars to meet lending and reserve needs. They avoided borrowing rupees in the overnight market, where interest rates surged to a decade-high.
“The rupee is being influenced more by liquidity conditions than by genuine demand,” said V. Rajagopal, chief currency trader at Kotak Mahindra Bank. “There will be pressure to sell dollars as long as the rupee shortage persists.”
The rate that banks charge each other on overnight loans has averaged 20% since 15 March, the day companies paid an estimated Rs40,000 crore in quarterly tax. The overnight borrowing rate averaged 7% between 1 January and 15 March, Bloomberg data show.
The rupee also declined on speculation the central bank will buy dollars to stem the currency’s rally, which is threatening to hurt exporters’ earnings, said Vikas Babu, a currency dealer at state-owned Andhra Bank in Mumbai.
A stronger rupee makes Indian goods and services costlier in the overseas market, eroding exporter competitiveness. Rupee gains also fuel imports, widening the current account deficit.
“Central bank intervention is anticipated at these levels to stem the rupee’s rise,” Babu said. “A section of the market may become panicky if the rupee continues to rise this way.”
India had a current account deficit of $11.8 billion in the nine months through December. The current account is a broad measure of trade that includes services, tourism, employee remittances and income from investments.
Foreign-exchange reserves climbed to a record $198 billion on 23 March, according to data given by the Reserve Bank of India, suggesting the central bank bought dollars.