The Hindu Business Line : FII outflow sparks demand for dollars

THE rupee slid to a near 10-month low against the dollar on Friday as import-related demand drove heavy buying of greenback. According to dealers, concerns of dollar strengthening against other major currencies and outflow of FII funds in the last couple of days sparked higher demand for the dollar in the local market.

The rupee opened at 44.23/24, higher than Thursday's close of 44.2750/2850.

The strengthening of the euro to $1.2105 caused the initial appreciation of the rupee. However, the local currency fell and touched an intra-day low of 44.4250 during the day before ending trade at 44.39/40.

The RBI Governor, Dr Y.V. Reddy, said that the developments in the forex markets on Friday were not unusual. Responding to queries from newspersons, he said: "Today's movements in bonds and forex markets are no different from any other day."

As fears of the rising US interest rate and strengthening dollar grip the forex market, bond market prices have been falling in anticipation of a domestic hike in the interest rate in the half-yearly review of the Credit Policy.

Dealers have been wary of taking any large positions with yields progressively rising. The Central bank cancelled a Rs 6,000-crore auction on Thursday because the yields quoted were too high.

According to Mr R.V.S. Sridhar, Vice-President (Treasury), UTI Bank, the dollar has been massively strengthening against other major currencies such as the euro and the pound sterling.

"US interest rates have been rapidly rising and signs of strong economic growth have caused appreciation of the dollar."

The rise of US interest rates implies less of deployable funds. The fall in the Sensex and FII outflows to the tune of $47.5 million this week have dampened sentiments, said dealers. Indian equity prices fell for the third day in row, erasing over 300 points of the Sensex.

Mr L.V. Prasad, Head of Corporate Sales, IndusInd Bank, said that there has been heavy demand from importers and the outlook for the rupee in the near term is bearish. "In the forward market, the premium is higher for the short term rather than the long term."

While the three-month premium closed at one per cent, the six-month and the 12-month premia closed at 0.82 per cent and 0.7 per cent respectively.

The domestic current account deficit of $6.2 billion for the first half of the year has only added to the worries for importers.

Besides the demand for dollars from importers, a dealer at a private bank said, foreign investors are using the arbitrage opportunity between the offshore Non-Deliverable Forward (NDF) market and the onshore market to buy dollars.

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