Re falls on rate cut, dollar purchase

Rupee dropped after the central bank cut interest rates for the second time this year and amid speculation that some companies bought dollars to pay for imports.

The currency approached a record low on concern that sliding borrowing costs will diminish the appeal of Indian assets. The rupee also weakened after the Sensex slumped, fuelling concern that overseas investors will increase sale of Indian equities. The offshore forward contracts showed that the traders increased bets for further rupee weakness.

“Importer demand is consistent and is in keeping with the broad sentiment against the rupee,” said Sanjay Arya, a Mumbai-based treasurer at the Bank of Maharashtra. “The interest-rate cut has only taken away the likely support to the local currency. I expect further weakness in the rupee.”

The currency fell 0.4 per cent to 51.765 a dollar at the close of trade in Mumbai. It touched a record-low 52.185 on March 3.

Two-year Indian government debt yesterday offered 4.08 percentage points more than similar-maturity US Treasuries, narrowing from as high as 7.13 percentage points in October.

The sale of Indian shares by foreign funds exceeded purchases by $1.8 billion this year, adding to a record $13.3 billion in net sales in 2008, according to the data provided by the Securities & Exchange Board of India. The Bombay Stock Exchange Sensitive Index, or Sensex, fell 2.1 per cent, extending this year’s losses to 15 per cent. It slid by a record 52 per cent last year.

“Stocks are not showing sustained gains, which suggests investors are not fully confident about their prospects,” said Roy Paul, assistant manager of treasury at Federal Bank in Mumbai. “The rupee is under continued pressure to decline.”