The rupee today closed at a new nine-year peak

The rupee today closed at a new nine-year peak of 40.28/29 against the U.S. dollar on the back of sustained capital inflows amidst weak dollar overseas. In active trade at the Interbank Foreign Exchange (Forex) market today, the Indian unit opened remarkably lower at 40.37/39 a dollar from previous close of 40.3200/3250 per dollar. Later, the rupee got strong support at lower levels and bounced back to settle at Rs 40.28/29, a gain of nearly four paise over previous close. The previous nine-year high was 40.3200/3250 per dollar, recorded on July 20. Dealers attributed early fall in the rupee to dollar buying by importers and oil refinery companies to meet their import requirements. The global crude oil prices remained high over USD 75 a barrel, which may put pressure on rupee as oil companies would buy dollar to make payments for imports. India fulfills nearly 70 per cent of its oil demand through imports. The Reserve Bank of India (RBI) also intervened at the level of 40.23 to protect the exporters' competitiveness. Sustained capital inflows of nearly USD 5.4 billion in last 15 days and about USD 9 billions in the current year, mainly boosted the rupee sentiment, analysts said. According to them, the upside in the rupee may be capped in near future due to possibility of intervention of the apex bank, slow down in the capital inflows due to recent sharp surge in the Sensex and higher crude oil prices. Surplus liquidity in the system and lack of liquidity tightening measures by the RBI buoyed sentiment across markets. The spot rupee reached an intraday high of 40.23/24 after opening at 40.40.35/36. However, the RBI intervened to buy dollars from the market to quell the rupee appreciation and as a result, the spot rupee closed at a low of 40.29 to a dollar. While volumes in the government securities market reached Rs 10,000 crore on Monday and the yield on the benchmark ten-year paper fell to 7.75 per cent as against 7.82 per cent last week, forward dollars for the next three months were ruling at a discount. Incidentally, the ten-year paper fetches the same rate as that of the liquidity infusion rate of the RBI (repo at 7.75 per cent), which is the money lent for a day usually. Call rates, at which banks lend to other banks, continued to rule below 1 per cent by closing around 0.30 per cent. Prices of government securities moved up by 20-25 paise in the short-term maturity, while the medium- and long-term papers witnessed prices going up in the range of 40-85 paise. In the corporate bond market, the spread between the 10- year government paper and the triple-A corporate bond of similar maturity narrowed down to 140 basis points as against a high of around 200 bps a few weeks earlier. One basis point is one hundredth of a percentage. Volumes in interest rate swap deals based on overnight MIBOR also reached Rs 5,000 crore, backed by the view that the RBI may take a pause in its interest rate stance in the forthcoming monetary policy review. According to dealers, banks and mutual funds have started aggressively investing in the corporate bonds to earn the interest rate differential. The interest rate for triple-A papers in the ten-year maturity has come down from the highs of 10 per cent to 9.30 per cent and is further expected to come down to 9 per cent following excess liquidity. On the other hand, interest rates on one year certificate of deposits have come down from 9 per cent to 7.5 per cent. Dealers expect the rate on two to three months� CDs to come down to 4 to 5 per cent against the highs of 10 per cent a few weeks earlier. Similarly, following the low-cost of rupee funds and heavy selling of dollars by corporates and banks, forward dollars for three months slipped into discount. Usually a premium (spread over the spot rupee-dollar exchange rate) is to be paid to book dollars for a future date called forward dollars. On the contrary, forward dollars are available cheaper than the spot rupee since the view is that the rupee may continue to appreciate following heavy foreign exchange inflows, said a forex dealer of a PSU bank. Bloomberg adds: Ten-year bonds gained for a third day after the central bank cut by more than half debt sales aimed at draining spare cash from the banking system. Yields fell to the lowest in 5 1/2 months after the Reserve Bank of India said July 20 it will sell bonds and treasury bills worth a total 45 billion rupees ($1.1 billion) this week to drain funds, compared with 95 billion rupees last week. Bonds also gained on speculation dollar purchases by the central bank in the currency market will boost cash at banks. "Bonds are rallying because the central bank has reduced its stabilization bond sales this week,�� said Anoop Verma, a bond trader at Development Credit Bank Ltd. in Mumbai. ``There�s a lot of money in the system." The yield on the benchmark 7.49 percent note due April 2017 fell 6 basis points, or 0.06 percentage point, to 7.75 percent as of the 5:30 p.m. close in Mumbai, according to the central bank�s trading system. The price rose 0.44, or 44 paise per 100 rupee face value, to 98.25. The Reserve Bank sells bonds and treasury bills every week to drain excess cash in the economy that may stoke inflation. The bank has a yearly limit of 1.1 trillion rupees on such sales.

With banking system facing excess liquidity, interest rates have started softening up. Banks are considering to lower both deposits and lending rates. While it will help companies and individuals, who want bank or home loans, it will affect depositors who depend on interest income.

From April to July 6, 2007, while deposits with banks rose Rs 1,05,554 crore, credit offtake declined by Rs 14,386 crore. During the same period last year, credit offtake had increased by Rs 33,818 crore. Some bankers argued this is an indication of slowing down of the economy, which would be visible in the later part of the financial year.

Because of rise in deposits and decline in credit offtake, bankers are flush with liquidity. The overnight call money rates have declined to around 1%. On Monday, banks offered almost Rs 1 lakh crore to RBI in auction of overnight security at 6%, which is called reverse repo. RBI accepted only Rs 3,000 crore.

Deputy MD of ICICI bank Chanda Kochhar said since liquidity condition has improved, interest rate on wholesale money has come down. This, she said will have impact on retail deposits and lending rates.
Union Bank of India has announced a cut in rate on one year to three years deposits to 9% from 9.5%. CMD MV Nair said liquidity has improved, which would lower rates. He said, deposits are growing at around 25%, which is higher than what was expected at the start of the year.

A source said, main reason for sudden jump in the deposits is high interest rates offered by banks, which is more than 8% offered by government on small savings like post office deposits.

On credit offtake Nair said the present weak demand from corporates is normal as it picks up in the later part of fiscal year, irrespective of interest rate. But, the high rates had affected demand of retail credit, which would improve if interest rates come down.

Nair said lending rates would come down if inflation continue to remain at present level of 4.3%. If it rises again because of surplus liquidity, government will intervene to contain the money supply.

But, because of excess liquidity, RBI will not be able to intervene to support rupee, which has appreciated to Rs 40.28 per dollar on Monday. If RBI buys dollars, the rupee supply in the market will further go up. This will put further downward pressure on interest rates. According to a senior banker, RBI still feels that lowering of interest rates is inflationary.

Therefore, another banker said, the inflation will be the key in movement of interest rates. If RBI is not convinced that inflation has been tamed, it will not give a signal to lower rates.
The rupee is appreciating. While this may be seen as a good thing in most quarters, it seems to have hit techies hard. Software exporting firms will get fewer rupees to the dollar. Reports have it that Bangalore techies may have to put in more hours and perhaps even work on Saturdays to compensate. They haven't received the news too happily.

WORK-LIFE BALANCE

All over the world, cities have a weekend culture. People plan for their weekends: they travel, go camping, visit people and, of course, party. These outlets are necessary for people who put in a lot more today in the office than, say, 10 years ago. Work pressures have increased and people need to take a two-day break, unwind and come back to work feeling fresh. Rachna Kannan, HR executive with a technical firm, says, "As it stands, there is no work-life balance. It's going to tilt the scales further if they make it a six-day week. It's definitely going to have a negative effect on work output too. Just because people put in more hours, it doesn't mean more work will get done. What they have to do in six days, they can very well do in five."

Chetana Suresh, newly-wed and working with a BPO, says, "How will we find the time to complete our chores at home? And since my husband and I work odd hours, with all the work to be done at home, we get only Sunday to even see each other. If they make it a six-day week, I might as well say goodbye to my marriage and marry someone at work," she says.

SPOIL THE PARTY

"Not fair. Just when we were getting used to early deadlines and partying more days in the week comes this blow," moans Sajan Menon, a party-happy software engineer. "If it becomes a reality it's going to change weekends in the city drastically. People were just switching over to the concept of weekends as even non-IT corporates only recently shifted to a five-day week. People got an extra night, on Fridays, to let their hair down and even the early deadlines imposed by the authorities didn't seem to dent the party spirit. But this news changes all that," he says.

Club owners too aren't very happy with the proposal. According to club owner Rajanna, "People party at least once a week. It's either Friday or Saturday for many. If Fridays are going to be knocked off their weekly party calendar, that leaves just Saturday and the crowds are going to be unmanageable at nighclubs. Our profits too will be hit if people don't party on Fridays."

NO GETTING AWAY

Adventurer Santosh Kumar, who heads for the forests and rivers around Bangalore during weekends , is upset. He says, "It's going to affect the weekend tourism business very badly. Trekking and rafting clubs will be hit as a big chunk of the clientele is the Bangalore techie." Software engineer Praveen Kumar, who's also a motorbike enthusiast, says, "I ride out almost every weekend either alone or with a group of friends. It relaxes me and brings me back fresh to the office. A six day week will kill this for me."

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