Rupee drops 1.5% on dollar demand from importers

The rupee on Monday weakened 96 paise, or 1.5 per cent from its previous close, to 64.31 a dollar, tracking offshore rates. The slide, aided by month-end dollar demand from importers, prompted the Reserve Bank of India (RBI) to step up its dollar sales in late trade, pulling the Indian currency off session lows. Sustained foreign selling in equities also continued to raise concerns about the gaping current account deficit (CAD).

Finance Minister P Chidambaram had met foreign investors on Saturday to seek suggestions on attracting dollar flows.

The country urgently needs to attract capital as foreign institutional investors (FIIs) have sold about $4.2 billion in bonds this year. Adding to concerns, overseas funds are also shedding some of their stock positions, having sold about $750 million in equities over the previous six sessions.

"FII debt investors in India will come back only if there is currency stability but not because of a little higher interest rate," said Samir Lodha, managing director, QuartArt Market Solutions.

Eleven of the 17 economists polled by Reuters said the currency would be the top priority for incoming RBI Governor Raghuram Rajan but the consensus showed it would likely weaken to 69 a dollar before rising.

The rupee on Monday moved in a wide range of 63.65 to 64.75 during the day. Traders said heavy central bank intervention through state-run banks, starting around 64.75 levels, helped the Indian currency recover towards close. RBI has been spotted intervening in the market in late trade repeatedly in recent months.

The rupee, which fell to a record low of 65.56 a dollar in intra-day trade last week, has lost 14.5 per cent so far this year.

Monday's fall tracked the one-month offshore non-deliverable forward rate, which was being quoted at 65.02 a dollar, compared with the onshore one-month forward rate of 64.88. Traders also said importer demand for dollars was key in pressuring the rupee lower, as dollar demand typically peaks at the month-end, when importers are required to make payments.

"Oil companies and importers who missed the late down move in the dollar on Friday were buying dollars today," said Vikas Babu Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank.