Mumbai: The rupee erased intraday gains after touching its highest in more than a week on Monday, in line with the euro’s losses against the dollar, with a fall in domestic shares prices also dampening sentiment.
Traders awaited the Reserve Bank of India’s policy review on Tuesday, which is likely to throw cues about capital flows into local stock markets in the coming months.
The Reserve Bank of India (RBI) is widely expected to raise key interest rates by 25 basis points (bps) at the review.
The partially convertible rupee ended at 47.04/05 per dollar, after touching an intraday high of 46.80, its strongest since 16 July and about 0.2% weaker than its previous close of 46.94/95.
“The market will wait for how the RBI policy is going to come out. There will not be much activity before the policy. But after the rate decision, an impact on stocks will have a reaction on the rupee too,” said Paresh Nayar, head of foreign exchange and money markets at First Rand Bank in Mumbai.
Rate hikes could temporarily hurt the rupee if stocks fall, but in the long run would help the currency gain on the back of strong capital inflows due to the interest rate differential between the advanced economies and India.
The rupee fell after the euro gave up its gains against the dollar as some risk aversion set in following investor calmness after release of European banks’ stress test results on Friday.
Just seven of 91 banks failed the tests, including six in Spain and Greece, for an overall capital shortfall of €3.5 billion.
The index of the dollar against six major currencies was down about 0.1%.
A fall in local share prices also hit sentiment. The BSE index Sensex fell 0.6% on Monday.
Foreign capital in local shares is a key driver of the rupee. So far in 2010, foreign investors have bought a net $8.9 billion worth of shares, in addition to last year’s record $17.5 billion inflow.
One-month offshore non-deliverable forward contracts were quoted at 47.18, weaker than the onshore spot rate.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX ended at 47.0650 and 47.07 respectively, with the total traded volume on both exchanges at $4.9 billion.