Rupee to test 44-level; RBI to halt any sharp moves

The rupee could strengthen to drop below the 44-level against the dollar again this week as balance flows from overseas investors for Coal India Ltd’s (CIL) initial public offer (IPO) come in, according to foreign exchange dealers. The currency could, however, weaken slightly in the latter half of the week on demand for dollars from importers.

“Global markets have also been very volatile and with Bernanke hinting at the possibility of further quantitative easing in the US, there could be a further pressure on the rupee,” said Ananth Narayan, managing director and head of rates, credit and FX at Standard Chartered Bank.

The rupee soared to 43.98 against the dollar in intra-day trading on Friday—its highest level since August 2008. The rupee could trade between 44.15 per dollar and 43.85, according to Rupa Rege–Nitsure, chief economist with Bank of Baroda. The Reserve Bank of India (RBI) is unlikely to let the rupee gain much. On Thursday, the RBI stepped in to prevent the rupee from strengthening further, possibly for the first time this year, after it had touched 44.10 against the dollar, according to currency traders. The rupee has gained 0.9 per cent this week, making it the seventh weekly rise, according to Bloomberg data.

Governor D Subbarao on Friday said India may intervene “if inflows are lumpy and volatile” and disrupt the economy, reiterating comments made in Washington last week.

A large IPO this week is also likely to drain liquidity from the system. In addition, consumers are likely to increase their cash withdrawals from banks with the onset of the festive season. A senior State Bank of India official said there are concerns about a liquidity shortage, with an estimated Rs 11,000 crore expected to flow out of the system for Coal India’s IPO. Consequently, banks have stepped up borrowing at Liquidity Adjustment Facility window, the official added.