Our Bureau

Mumbai, Nov. 4

THE rupee dropped to a year's low against the dollar on the back of strong demand for the US currency from importers. The appreciation of the dollar against other major currencies also aided the fall.

The domestic unit slid by about 20 paise with demand outstripping supply of dollars.

According to analysts, the rupee seems to be moving in tandem with other major currencies such as the euro.

It opened at 45.38/39, lower than Thursday's close at 45.30. It then kept falling during the day to close at 45.52/53. These levels were seen last on October 28, 2004.

Mr Moses Harding, Executive Vice-President, IndusInd Bank, said the rupee is tracking the euro and the euro is struggling at the 1.19-mark against the dollar. He said, "On November 2, the US Federal Reserve signalled further rate hikes, leading to expectations that the US interest rates will touch 4.5 per cent by March 2006."

The dollar had strengthened against the euro and the Japanese yen on Thursday, aided by strong US economic data and by the European Central Bank's decision to keep interest rates on hold.

Dealers said global concerns about the rising US interest rates have led to a negative sentiment in the forex market. There is heavy domestic demand for dollars from importers who had been sitting on un-hedged positions in anticipation of an appreciation in the rupee.

Mr V. Rajagopal, Chief Dealer-Forex, Kotak Mahindra Bank, said importers are now covering their positions while exporters are cancelling their forward contracts, in anticipation of a further depreciation in the rupee. Dealers said that corporates accessing foreign funds would be hit because of the hardening LIBOR (London Inter Bank Offered Rate). Mr Harding said: "There will be a widening of the dollar demand-supply mismatch.

"There is a possibility of the rupee touching 46, but we must see how RBI behaves."

If the euro goes to $1.18/1.2815, which is a crucial level, then rupee could open at 45.70/75.

"The weakness in the rupee will push inflation up further, because prices of oil and other commodities could also rise," he said.

Meanwhile, the RBI said it is reworking the real effective exchange rate indices and would announce the new data by December.

The country's forex reserves have gone up by $678 million to $143.774 billion as on October 28, 2005.

(This article was published in the Business Line print edition dated November 5, 2005)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.