Rupee rises in fiscal year; banks buy for reserve needs

Mar 30 | Updated: Mar 31 2007, 06:03am hrs
Indias rupee gained the most in a fiscal year since 2004 after paring the biggest drop in 11 years on Thursday on speculation banks sold dollars to meet reserve and fiscal year-end requirements. Lenders sold the US currency to balance accounts and avoid borrowing in the overnight market, where interest rates climbed more than seven-fold because of the increase in demand for funds.

Indian lenders must report average daily cash reserves kept over the past two weeks to the central bank on Friday, a deadline that coincides with the fiscal year-end. People are going short on the dollar to raise cash because the call money rate has shot up, said Pankaj Sharma, chief currency trader at state-owned Union Bank of India. Banks are raising rupees since Friday is reporting day, and to make fiscal year-end provisions such as taxes. The rupee traded at 43.49 against the dollar as of the 5 pm close in Mumbai, an increase of 2.7% from a year ago, according to data compiled by Bloomberg. It rose 1.8% in March, the biggest monthly increase since October. The currency reached the strongest in almost eight years on March 28, before slumping yesterday. It may rise to 43.40 on dollar sales, Sharma said.

The rate banks charge each other on overnight loans increased to as high as 70% from 9.25% on Thursday, Bloomberg data show, on increased demand for funds. Indian banks have to set aside as much as 6% of deposits as cash reserves and report such positions to the central bank every alternate Friday.Volatility on one-month rupee options reached the highest in three months on March 28 as traders bought protection on a further advance in the currency after it rose to the strongest since June 1999.

Volatility eased as the rupee dropped yesterday. The rupees rally may prove short-lived on speculation an increase in government spending toward the end of the fiscal year will boost cash in the banking system, lowering money market rates.Cash flow into banks typically increases near the end of March as ministries step up spending to meet targets for the fiscal year, said Mohan Shenoi, treasurer at Kotak Mahindra Bank in Mumbai.

The government traditionally spends the most in March, Shenoi said. Such spending will boost liquidity and help ease call rates. Once that happens, we will see demand emerging for dollars and the rupee retracing its gains. The rupee may fall to 44.20 a dollar by the second week of April if it breaks beyond 43.80, a key level on technical charts, he said.