Rupee wipes out losses

Rupee wipes out losses
EEB & AGENCIES

MUMBAI, MAY 11: After Wednesday's stunning crash, the Indian rupee staged a surprise recovery on Thursday, wiping out a substantial portion of the previous day's losses on State Bank of India's (SBI) steady dollar sales.

The rupee ended at 43.88/89 per dollar, showing a gain of nearly 17 paise. It had opened little changed from Wednesday's record low close at 44.05/07. Dealers said corporate flows had been negligible and trade was purely inter-bank driven.

"Today was a day of just the SBI's sales. Initially the market was caught by surprise, but the longs (of dollars) were gradually squeezed out," a dealer with a foreign bank said. The SBI's heavy dollar purchases and some imports had driven the rupee's 0.85 per cent (40 paise) fall on Wednesday, and the market was still trying to interpret the two days' moves, dealers said.

"It is quite likely the dollar bids this morning got the central bank worried. They probably wanted to ensure importers did not panic," the chief dealer of a foreign bank said. There were hardly any cash deals (for settlement on Thursday) on account of a bank employees' strike.

Traders had said Wednesday's move was engineered by the central bank.Dealers said the SBI's dollar sales on Thursday were also possibly at the RBI's behest.

The Finance Minister Yashwant Sinha had on Wednesday said the rupee's volatility was on account of a temporary mismatch in flows and he hoped the RBI would respond adequately to the situation. Dealers said they did not expect a full retracement of Wednesday's steep fall from levels of 43.68 and were expecting dollar bids to emerge.

But the slow rise in forward premia indicated hedging was still not aggressive, they said. The six-month forward premium ended up at 2.47 per cent compared with Wednesday's 2.40 per cent.

Dealers predicted the rupee will weaken slightly in the near-term and head closer to the 44 level. "I still think it was a planned move and today's actions were aimed at ensuring importers did not panic," the chief dealer of a foreign bank said.

The market speculated the RBI may have wanted a weaker rupee for several reasons, including the need to adjust the real effective exchange rate (REER) and keep it on par with other Asian and global currencies which have been falling. "It's just a one percent adjustment after a year of stability, it's quite tiny. If you look at it as a weakening against a very strong dollar, it's really an adjustment for dollar strength rather than rupee weakness," another dealer said.

In the past few months, major Asian currencies like the Japanese yen and the euro, as well as Asian currencies like the Thai baht and Indonesian rupiah, have weakened. The baht has lost 3.7 per cent and the rupiah 15 per cent this year. The rupee, technically a gradually depreciating currency, has been very strong in the past year amid large foreign investment. This has boosted confidence in it, with most importers choosing not to hedge.

Wednesday's crash had unsettled some corporates, but if they perceived the rupee would stabilise soon, the current demand for dollars would subside.