Rupee slips to 17-mth low, prompts $ sale

Written by Mahalakshmi Hariharan | Mumbai Aug 26 | Updated: Aug 27 2008, 06:28am hrs
With heavy demand for dollars from oil companies and short covering, the Indian rupee witnessed a rapid fall on Tuesday, touching a 17-month low of 44.10/11 against the greenback. This prompted the Reserve Bank of India (RBI) to intervene to check the sliding rupee.

Later in the day, the rupee bounced back to end at 43.84/85 against the dollar, as against 43.79/80 on Monday after the RBI intervention.

Traders said that once the rupee breached 44 levels, late afternoon, there was intervention by the central bank.They added that major oil companies were seen buying the dollar at a rate of Rs 43.95-44.05.

There was heavy selling of dollars by public sector banks, on behalf of the Reserve Bank of India, which helped the rupee from depreciating further, said C Chandrasekhar, senior vice president with Mecklai Financial and Commercial Services Ltd.

Traders noted that about $300 million to $400 million were sold during the intervention by the central bank, on Tuesday.

Chandrasekhar pointed out that the depreciation in rupee was mainly due to the dollar weakening overseas.

There was heavy buying by oil companies, on account of a depreciating rupee, he noted.

So far in 2008, foreigners have sold $6 billion worth Indian stocks and the rupee has shed more than 10% against dollars. It is said to be one of the major looser among the other Asian currencies. Last year, the rupee rose more than 12%.

Other factors affecting the Indian currency are high oil prices, muted capital inflows, high inflation and interest rates, noted a public sector bank dealer.

Chandrasekhar is of the opinion that rupee will start showing some signs of improvement by December 2008 or latest by March 2009, when inflation may show some signs of cooling.

By December-March, rupee may touch 42 levels or go even below these levels, given the economy scenario improves. Right now, high interest rates are also contributing heavily to a weak rupee. However, by the end of this fiscal, things should get under control, he added.

However, apart from high oil prices, widening trade deficit may also put pressure on the local currency.

On Tuesday, oil fell below $114 per barrel, as the dollar strengthened. The dollar was also seen strengthening against the other currencies on Tuesday. Rupee will hover around 43.50-44.20 levels against the dollar during the week, said the public sector bank dealer. Meanwhile, rise in non-deliverable forward (NDF) market was seen quoting at 44.10/20, weaker than the onshore rate.

Also the countrys forex reserve has seen continous fall in last two months. Total forex reserves dropped $3.8 billion to $296.2 billion for the week ended Aug 15. I last two moths it has fallen by $15 billion.