MUMBAI, Aug 20: The rupee hit an 18-month low of Rs 36.14 against the greenback on Tuesday in reaction to prime minister IK Gujral's reported statement that the government would set a band within which the rupee-dollar rate could move.

The report, later explained away by the Reserve Bank of India as misleading, saw the rupee plunge 42 paise from the overnight close of Rs 35.72 before gradually correcting itself and closing at Rs 35.95. The spot rupee, which opened the day at Rs 35.74/75 levels, went for a free fall as banks panicked immediately after the Gujral statement came to be widely known. The dollar touched the Rs 35.90 barrier in morning trades and subsequently went on to plumb the depths at Rs 36.14. Dealers said no trades were done at this level, but a few said some deals even touched Rs 36.18.

The rupee, however, turned around when the RBI put the record straight and denied the news report. "It is clarified that while the committee on capital account convertibility (the Tarapore committee) has recommended a band in relation to a neutral real effective exchange rate, no decision in this regard has been taken by the government and the RBI," the statement said.This had the desired impact as the rupee began to climb back and reached the Rs 35.80/85 level. Subsequent covering by banks saw the rupee weakening once again and crossing the Rs 35.90 level. The currency closed at Rs 35.93/95 level.

The six-month forward rupee, which has been weakening since the beginning of the week, reacted sharply and fell by a whopping 32 paise over Tuesday's close of 105 paise. "After the deputy governor of the RBI, YV Reddy, made a statement in Goa that the rupee is overvalued and needs correction, the six-month annualised premia has been climbing," says NS Paramasivam, senior vice-president (forex), Essar group. The six-month forward premia climbed to 7.9 per cent from Tuesday's close of 6 per cent, dealers said.

While treasury heads are unanimous that the rupee will not touch Rs 35.70/75 levels anymore, they are equally sure that the six-monthly forward premia will not remain at such high levels either. "This does not reflect the correct interest rate scenario that is prevalent now. The outlook is that interest rates are set to decline and call rates are also not in alignment with these rates. So, it has to come down," a dealer with a European bank said.

J Moses Harding, head of forex at IndusInd Bank, said a complete lack of depth and liquidity saw the rupee losing ground. "A sense of fear has set in the minds of corporates and they will come forward and cover, creating demand for dollars," he said. In today's trading, "a lot of banks were missing from the action. There were no quotes from them," Paramasivam said.

According to some corporate treasury heads, the opportunity to arbitrage between one-year non-delivery forwards in the overseas market and one-year forwards in the local market was immense. "Strong corporates availed themselves of this opportunity to drive the forwards up," a treasury head in an oil company said.

Analysts are, however, sure that the process of the rupee weakening has started. "Very soon the demand from the oil companies will come, once the government issues bonds to them," P Mukherjee, chief forex dealer at UTI Bank, said. Treasury heads said that the rupee will weaken to Rs 37.10/20 over the next few months, to reflect the neutral exchange rate of the rupee. "A band of 5 per cent should be created around this rate," dealers said.

Market players locked in debate over `ideal' band, feel rupee is overvalued.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.