The Hindu Business Line : Rupee down by 20 paise

Mumbai, Oct 17 The rupee which has been on a gaining spree, weakened by 20 paise against the dollar, on the back of SEBI’s proposal to contain capital inflows, through participatory notes.

On Wednesday, the home currency saw choppy trade. The rupee opened lower at 39.85 and touched a low of 39.95/96. This came as an interim relief to exporters, who then started selling in huge numbers.

This pushed the rupee back to a high of 39.49, before closing at 39.54/55, against the earlier close of 39.35. The rupee has appreciated by around 11 per cent since January 2007.

The RBI has been consistently buying dollars in order to cap the rupee’s gains. But it is unlikely that it may continue doing so, as high oil prices are still a cause of worry, said dealers.

“High oil price will trigger inflation. So, it is unlikely that the RBI would take any measures to protect the dollar," said Mr Shyam Poddar, Managing Director, Forex-Capital Services Private Ltd.

In forward premia, the six-month closed at 1.44 per cent (1.62 per cent) and the one-year at 1.18 per cent (1.29 per cent).

"Quite a lot of people are still selling in the cash market and buying forwards because there is heavy demand in the NDF market. This is because of the interest cost differential between India and the markets abroad," said the head of research of a securities firm.

The arbitrage in the NDF market is about 15 paise, said Mr Poddar. "The NDF market has zoomed up and this will influence the spot rupee market," he said.

NDFs (non-deliverable forwards) are derivatives used for trading in non-convertible or restricted currencies without delivery of the underlying currency.

The profit or loss at the time of the settlement date is calculated by taking the difference between the agreed upon exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of funds.

Judging by the hectic activity in the forward premia in the last week, it seems like the RBI too is buying spot and selling in the forwards market.

But this will not help the problem of excess liquidity, as it will only postpone liquidity to later months, dealers said.

“The only option for RBI to tackle the huge liquidity is to increase repo rates,” said a forex dealer.