Rupee drops on RBI move

The foreign exchange market was highly volatile on Tuesday as banks bought dollars early in the day on behalf of oil companies. However, banks panicked and began selling the greenback to mop up rupee funds as the Reserve Bank of India (RBI) raised CRR and repo rate to suck out liquidity in the system.

The spot rupee opened on Tuesday at 42.63-65 and moved down to 43.80 as banks bought dollars on behalf of oil companies following RBI’s announcement to gradually terminate its open window for selling foreign exchange to

facilitate dollar payments by oil companies. The rupee rose to Rs 42.67 against the dollar as RBI moved to suck out liquidity in the system, triggering a selloff of the greenback by banks to rush for rupee funds. At the end of trade on Tuesday, the closed 12 paise down to Rs 42.67 over Monday’s closing at 42.55.

RBI’s announcement led banks to place certificates of deposits (CDs) in the money market to mop up rupee funds.

According to dealers, the cost of placing the three-month CD at 10.75-10.80 per cent is much more expensive than the swap cost of converting dollar funds into rupees.