The rupee gained sharply for the second consecutive day as the market, charged by positive sentiments and foreign exchange inflows, took the rupee to a new nine-year high at 39.88 a dollar on Wednesday.
The US Federal Reserve rate cut of 50 basis points late on Tuesday to 4.75% impacted major currencies, including the rupee. ?It would be a while before the currencies stop appreciating against the dollar,?? one dealer said.
The subprime home loan mortgage crisis led to the Fed lowering rates as a measure to tide over the immediate liquidity crunch faced by several US banks. A general view held by domestic market players is that about $150 billion worth of collateralised debt obligation papers, or securitised mortgaged-backed home loan papers, have virtually become worthless after the recent US property crash. Hence, the
Fed had to provide a cushion for banks? day-to-day operations.
Dealers said the rupee took its cue from the euro, which gained to $1.40 in early trades, from the previous day?s level of $1.39. After opening with a gap at 40.05 a dollar from the previous close of 40.20, the rupee rallied to a high of 39.87 and closed around the same level. There was strong intervention by the Reserve Bank of India.
?The market has now resigned to the fact the there is little the RBI can do but intervene to prevent sharp swings either way,?? said a dealer at a foreign bank. The currency is likely to gain further, and may test 39.80 levels on Thursday, dealers said. ?If it pierces the 39.80 level, the rupee could rally another 30 paise to 39.50,? said a dealer at a private bank.
The appreciation will certainly hit exporters, who may now seek fresh tax incentives to offset the losses caused by the domestic currency?s appreciation. Dealers said that predicting the longer-term movement was difficult, especially when the extant of US subprime home loan defaults are not yet known. ?It is not known where (which countries) the risks are sold and when the crisis could eventually surface,?? said a research analyst at a foreign institutional investor.
In case the bubble eventually bursts, there could be uncertainty and, perhaps, sharp outflows of foreign investment from emerging markets including India, he added.
