By Saikat Chatterjee / Reuters
Mumbai: The rupee surrendered gains on Thursday, 9 August, as stocks dropped on worries about fallout from the US subprime mortgage sector, and traders said the central bank may sell while it was weak to push it away from nine-year highs.
European stocks led other market lower after BNP Paribas froze $2.2 billion worth of funds, citing the subprime woes.
Worries over problems in credit markets saw investors pare risk by selling high-yielding currencies, and an unwinding of carry trades sparked a surge in the yen.
The rupee ended at 40.53/54 per dollar, off an intraday high of 40.39 but just softer than Wednesday’s close of 40.5250/5350. It hit a nine-year high of 40.20 in late July.
“Dollar/yen has moved up by one big figure in the day and local stocks have fallen by more than 400 points from its early peaks,” said a local trader.
“This is not a good sign and we will see a gradual move towards 41 per dollar, which will be the next key support level for the rupee,” she said.
Indian shares fell as much as 3.1% from an early high, before closing down 1.4%.
The rupee had risen in early deals despite an increase in the central bank’s intervention firepower.
The ceiling on market stabilisation bonds (MSS), which are used to absorb rupee funds generated by currency intervention, was raised to Rs1.5 trillion ($37 billion) from Rs1.1 trillion late on Wednesday.
It followed Tuesday’s curbs on foreign borrowings by local firms in a bid to try to check some of the huge capital inflows that have driven the rupee higher this year.
The central bank bought more than $23 billion trying to cap the rupee in the first five months of 2007, latest data shows, and the higher MSS ceiling meant further intervention was likely — including into a weakening market, traders said.
“They will take advantage of any sharp rupee fall to sell into it and push it further lower,” a trader from a European bank said.