Rbi Re Prop Impact Seen Continuing

FOREX Market

The foreign exchange market is expected to be stable this week as it continues to hold under the impact of the Reserve Bank of India's (RBI) rupee support package that was announced on August 13.

Dealers said unfavourable external developments will have, at best, a limited impact on the local market, keeping the dollar in demand and lending the rupee a mild weakening bias. The spot rupee may range between 42.50 and 42.65 and six-month forward dollar premiums between 9.5 and 11 per cent, they said.

Spot trade will be fairly active with normal volumes. However, dealers said nervousness over developments in emerging markets like Russia, which are generating expectations of a worldwide recession, may have a knock-on effect on India.

"Sentiment is mildly bearish and the general market perception is that while the central bank will prevent volatility in the market, it wants to further soft-land the rupee," a private bank dealer said. Dealers said they expected steady demand from corporates in the spot market. Exporters may hold back remittances in expectations of better rates, they added.

With steady pressure on the exchange rate, the rupee should slip from the present 42.50 to 42.55 range to the 42.58 to 42.62 range towards the end of the week, dealers said. Normal-to-active demand is expected in the forward segment of the market too. Dealers said there may be supplies from exporters as dollar premiums are ruling at attractive rates.

The RBI's rupee support package induced a hike in near-term rupee interest rates as well as forward dollar premiums by hiking the short-term rate on its securities re-purchase (repo) agreement to eight per cent from five per cent. It also hiked the cash reserve ratio to 11 per cent from 10 per cent. This reduced the bearishness in the spot market and eased the demand for forward dollars.