FII flows pull back Re liquidity tightens

Despite breaching the Rs 55 per dollar mark again on Thursday, the rupee remained strong due to dollar sale by foreign banks and inflows by foreign institutional investors (FIIs). On Thursday, the Indian currency ended at Rs 54.69 a dollar, compared with Monday’s close of Rs 54.88. In intra-day trade, the rupee had weakened to Rs 55.09 per dollar and strengthened to Rs 54.68 per dollar.

“The rupee ended stronger due to inflows by FIIs and dollar sale by foreign banks,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai. According to data by the Securities and Exchange Board of India (Sebi), net investments by FIIs were $198.92 million on Thursday, compared with $152.71 million on Monday.

Mohan Shenoi, president (group treasury and global markets) at Kotak Mahindra Bank, said that the rupee is expected to trade in the Rs 54.50-55 range against the dollar on Friday. According to Shenoi, the bias is more towards weakening because, despite the government’s announcing a slew of fiscal and economic reforms, the market still awaits concrete actions.

Meanwhile, the banking system is still reeling under liquidity pressure.

This is evident from the fact that banks borrowed Rs 1,12,850 crore under the Reserve Bank of India’s (RBI) daily liquidity adjustment facility (LAF), compared with Rs 1,06,470 crore on Monday. Borrowing by banks are at near five months’ high. The liquidity deficit had stood at Rs 1,25,285 crore on June 20.

“The high LAF borrowings are a reflection of cash demand in the festive season. There is also gilts auction tomorrow, which is keeping the liquidity under pressure,” said Debendra Kumar Dash, assistant vice-president (money markets) at Development Credit Bank. RBI will auction gilts worth Rs 13,000 crore tommorow.

According to a gilts dealer with a state-run bank, another reason for the liquidity pressure is that banks are reducing their dependence on Certificate of Deposits and meeting cash requirement by borrowing under LAF.

The interbank call money rate also continued to be high. It closed at 8.12 per cent, down from 8.14 per cent on Monday.