Rupee recovers after 4 day fall against the US Dollar in Forex trade

The rupee turned stronger after a four-day slide and was quoted 11 paise higher against the greenback in morning trade on 28 June, on exporters dollar selling amid a slowdown in FII inflows.

In fairly active trade at the interbank Foreign Exchange (forex) market, the local currency resumed higher at 40.96/97 per dollar from the previous close of 41.00/41.01 and later surged to 40.90/91 a dollar in late morning deals.

Attributing the turnaround to a rally in high-yielding Asian currencies this morning, forex dealers said exporters dollar sales at 41.00 level helped rupee recover smartly.

A sharp rally in equity markets in morning trade also aided the rupee sentiment.

The benchmark Sensex was 106 points up on the back of firm global cues
The rupee on Wednesday closed at a fresh two-week low of 41.00/41.01 against the US currency following sustained month-end dollar demand from oil companies and weak equity markets, stretching losses for fourth straight session.
The rupee and foreign exchange reserves of the country are likely to come under more pressure as inflow of dollar -- which has already been affected by sanctions -- is expected to take a hit following the downgrading of its currency rating outlook by global rating agency Standard & Poor's.

Bankers and forex experts have ruled out any major impact after the S&P move, but privately admit that foreign portfolio investment will come down and corporates will find it even more difficult to raise money through global depository receipt (GDR) issues and syndicated loans. This will naturally slow down the inflow of foreign exchange.

On the other hand, the rupee may also face pressure against the dollar as the cluttered economic horizon is likely to force the corporate sector to take foreign exchange cover and safeguard its position. Over $ 500 million was already spent last week -- when the rupee fell by almost one unit to 45.67 -- after India conducted the nuclear tests and the US and othernations reacted by imposing sanctions and freezing loan assistance. As a result, forex exchange reserves had come down from $ 29.12 to $ 28.66 last week.

``If dollar inflows come down, naturally the rupee will become weak against the dollar. A good forex inflow will always keep rupee strong,'' said a dealer, adding, ``I expect the rupee to fall below the 41 level against the dollar shortly.''

When the rupee dropped to an all-time low of 40.77 on May 14 -- when fears of a slowdown in capital inflows and spurt in the forward premium on six-month dollar to 11 per cent per annum played havoc in the forex market -- the Reserve Bank of India (RBI) kept away from any direct intervention. Whenever the rupee showed signs extreme weakness last weak, State Bank of India was selling dollars in the market to prop up the value of the rupee.If the rupee crosses the 41 level against the dollar, the RBI is likely to enter the scene and intervene directly. ``However, the RBI intervention can help only to some extent. Itcan not go beyond a point as the forex level will be depleted by any massive intervention. Currently, India needs good forex position to take care of any outflow of money through other channels,'' said a source.

Another option for the RBI is to make structural changes in the policy by raising cash reserve ratio (CRR) and imposing other curbs. But it will be a reversal of policies again as the RBI had only recently lifted such curbs imposed -- to normalise the forex market -- in the beginning of the year. This will, however, lead to a rise in interest rates. While changing the outlook for India from `stable' to `negative', S&P had said, ``India's balance of payments could come under increased strain in the medium term from reduced inflow of both official and private capital.'' S&P also fears that reduced access to concessional loans (which now comprise nearly 43 per cent of the country's external debt) will increase the country's dependence on higher cost private funding.

The immediate casualty may bestate-owned Power Finance Corporation which has planned to raise $ 100 million through a syndicated loan. ``The recent development may push up the coupon rate (interest rate) on the loan,'' bankers said. Moreover, plans of many other corporates to come out with GDR issues and external commercial borrowings (ECBs) will not materialise in the near future. In fact, there was no GDR issue from India in the last six months. The inflow of FII investment to the stock markets is also likely to come down as many FIIs (they had brought in over $ 8 billion in the last four years) allot funds based on the country risk.

In fact, there is also a possibility of some FIIs even pulling out money. ``Much will depend on the budget. S&P could have waited till the government announced the budget,'' said Ramu Deora, president, FIEO, a leading exporters' body. However, experts rule out any crisis like 1991-92 when the country encountered a massive capital flight. As one banker said, Indian economy is much stronger now and theseare only short-term turbulences.

Indian RUPEE / US DOLLAR / EURO / YEN / British Pound / GOLD

In quiet trade at the Interbank Foreign Exchange (Forex) market, the domestic unit opened lower at 40.99/41.02 a dollar from Tuesday's close of 40.93/94.

It later moved in a range of 41.05 and 40.94 a dollar before concluding the day at 41.00/01 per dollar, a further fall of seven paise over the previous close.

In last four sessions the rupee had dropped by 29 paise.

Month-end dollar demand from oil refinery companies to pay import requirements weighed on the rupee sentiment despite fall in global crude oil prices below USD 68 a barrel, forex dealers said.

Sluggish local as well as Asian equity markets also dampened the rupee sentiment. The benchmark Sensex was down by 70 points on Wednesday.

However, looking at the sustained depreciation of the rupee, there was not much intervention from the central bank as it was happy with the current scenario.

Meanwhile, the dollar dropped sharply against the yen due to a sharp downfall in the US subprime mortgage market.

According to market participants, the sustained decline in the rupee for the last few days could be capped due to dollar weakness in overseas market and expectation of robust capital inflows. The Reserve Bank of India (RBI) fixed the reference rate for the US currency at Rs 41.01 per dollar and for the single European unit at Rs 55.04 per euro.

The rupee premiums on forward dollar improved further following sustained heavy paying pressure from banks and corporates due to liquidity crunch in the system.

Benchmark six-month forward dollar premiums payable in November ended at 57-1/2 - 59 paise, higher from 50-1/2 - 52 paise on Tuesday and the far-forwards maturing in May also closed up at 115 - 117 paise from 107 - 109 paise previously.

In cross-currency trades, the rupee held steady against the British sterling while declined further against the Euro and the Japanese Yen.

The Indian unit remained stable against the sterling to close at Rs 81.83/85 per pound. However, the rupee eased further against the European currency to end at 55.11/13 per euro from last close of Rs 55.08/10 per euro and also dropped against the Japanese unit to finish at Rs 33.47/49 per 100 yen from overnight close of Rs 33.25/27 per 100 yen.