Rupee off lows as RBI tightens hedging rules for foreign investors

By Subhadip Sircar

MUMBAI (Reuters) - The rupee fell on Thursday, but staged a strong rebound from intra-day lows as the Reserve Bank of India continued to bolster its currency defence by tightening rules for curbing speculation by foreign investors, and on rumoured central bank intervention.

The RBI stipulated on Thursday that foreign institutional investors would require a mandate from participatory note holders to hedge on their behalf.

Participatory notes are by far the most popular derivative instrument by which offshore investors can invest in the domestic stock market without revealing their identity.

The move pulled the rupee back to the day's high of 60.25 to a dollar, briefly turning positive on the day, as the central bank notification led to large dollar selling by foreign banks.

The RBI also continued its strategy of intervening via state-run banks to support the currency, several traders said.

"As such speculative positions taken by FIIs on such trades will be curbed to an extent. This clarification from RBI brought about a selling in the USD/INR which was trading around 60.70 levels prior to issue of the circular. However, this does not affect the basic direction of the currency pair which is still up," said Anil Kumar Bhansali, vice-president at Mecklai Financial.

The partially convertible rupee closed at 60.43/44 per dollar compared with 60.40/41 on Wednesday. It fell to 60.90 early in session, within striking distance of its life low of 61.21 seen on July 8.

The RBI's steps followed its earlier measures to tighten cash in the banking system to curb speculation.

The government and the central bank have stepped in to support the currency, with Finance Minister Palaniappan Chidambaram promising more reforms and RBI Governor Duvvuri Subbarao saying he would not mind some collateral damage in the course of efforts to ensure rupee stability.

In the offshore non-deliverable forwards, the one-month contract was at 60.97, while the three-month was at 61.91.

In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed around 60.73 with a total traded volume of $2.8 billion.

(Editing by Jijo Jacob)