Rs 4,795 Cr Repo Sale Fails To Resume Rupee

The rupee continued to weaken and closed yesterday at a new low of 45.41""losing 11 paise during the day""despite Rs 4,795 crore worth of repo auction draining liquidity from the money market at higher rates as corporates continued their dollar buying spree. The rupee had opened at 45.28/32 after closing at 45.31 on Thursday. Reserve Bank of India governor Bimal Jalan said weakness in the rupee was due to genuine demand from importers. He also said that he does not expect the interest rate hikes of last month to retard economic growth. Jalan described the RBI action in raising bank rate and CRR as a "correction" but declined to specify whether it had the desired impact. "We had never expected an immediate result, but we believe the July 21 measures will have the desired effect over time. That is why we spread it over a month," he said. On being asked whether RBI will further resort to hiking rates to protect the rupee, Jalan said the RBI would act independently and there would be no automatic response to any change in international interest rate trends. He also reiterated that in an ideal situation the RBI would like low real interest rates. The RBI yesterday increased the cut off rates in its 4-day repo auctions to 12 per cent from 10 per cent on Thursday and sucked out Rs 4,795 crore worth of funds. This led to tightening in call rates to 10 per cent levels while forward premia also moved up by six paise. The six-month benchmark forward premium closed at an annualised 4.61 per cent. The higher call rates did not deter the demand for dollars. "There can be very little speculation at current levels," said a dealer with a private bank. "The higher interest rates signalled by the RBI mean that banks would be forced to cut their long positions as they would not find it profitable to speculate in such lContinued on Page 8 an environment." Alok Sharma, chief dealer, Bank of America, felt that the RBI statement has not been able to change the market sentiment and "the level the rupee should eventually stabilise will be a result of the demand supply equation and its mismatches." Dealers see the rupee opening at 45.41 to 45.44 levels on Monday and say that the forward market will influenced by interest rates in the money markets Dealers see call rates moving beyond 10 per cent levels today in response to the higher repo rates. Security prices in the government bond market continued to remain weak due to the continued rupee depreciation with prices moving down by 10 paise due to higher interest rates in the repo auctions and call market.