Rupee breaches 41 mark

Drops 41 paise against dollar on fears of trade deficit widening.

Apprehensions of a higher trade deficit due to spiralling crude oil prices and its impact on inflation led to a bearish sentiment on the spot rupee market. The currency breached the 41-mark to a dollar and hit an eight-and-a-half-month low of 41.35/36 against the US currency.

Inflation based on the Wholesale Price Index is already ruling at a 42-month high of 7.57 per cent and oil accounts for a substantial chunk of India's import bill.

The rupee movement in recent weeks has led many to believe that the government and the Reserve Bank of India (RBI) may let the Indian currency appreciate "� and make imports cheaper "� to help combat the inflation situation better. But since Tuesday, the rupee has fallen 73 paise against the dollar.

The spot rupee opened a tad lower than Tuesday's closing of 40.94/95 to a dollar and in no time fell below 41 to a dollar. Incidentally, the rupee reached an intraday low of 41.41, which was primarily triggered by aggressive buying by oil companies, mainly Bharat Petroleum Corporation and Hindustan Petroleum Corporation, said dealers.
 

OIL SPURTS The biggest declines in the recent past
Rs vs $	Prev Close	Close	Change *
29/03/2007	43.05	43.75	0.7
15/05/2006	44.90	45.45	0.55
10/05/2007	40.91	41.43	0.52
10/12/2004	44.21	44.73	0.52
16/08/2007	40.84	41.34	0.5
08/06/2007	40.73	41.16	0.43
07/05/2008	40.94	41.35	0.41
19/09/2000	46.00	46.40	0.4
17/07/2006	46.37	46.76	0.39
05/03/2007	44.29	44.68	0.39
* Change in paise over previous close

Crude oil prices reached $122 a barrel following supply disruptions in major oil producing nations like Iraq and Nigeria.

However, most of the buying by oil companies are in the spot market or in near-term forwards. These oil companies have been booking dollars in futures for a maximum period of one month.

Besides, foreign banks continued to buy dollars on behalf of their custodian clients (or foreign institutional investors), who were not only booking profits in the equity market, but were also repatriating funds, resulting in an outflow, said dealers.

The bearish outlook on the rupee in the Indian markets led to arbitrage opportunities in the non-deliverable forward (NDF) market.

The NDF market is a derivatives market, where foreign investors take a position on the rupee-dollar exchange rate in the overseas market. At present, the view on the rupee is bearish and this may lead to notional purchase of dollars to be invested overseas.

The equity market closed flat and there were no fresh inflows.

All these factors put together pulled down the spot rupee to a low of 41.41, after which it recovered to close at 41.35/36 to a dollar. According to dealers, most of the exporters would have eagerly sold dollars at levels around 41.41, but most of them booked long-term contracts on Tuesday, when the rupee first touched an eight-month low of 40.94/95 to a dollar.

A lack of selling by exporters was also one of the reasons for the rupee premia for booking forward dollars going up. The annualised premia for six-month and one-year forward dollars closed at 1.75 per cent and 1.51 per cent, respectively on Wednesday compared with 1.6 per cent and 1.43 per cent, respectively on Tuesday.