Rupee Range-Bound

The rupee dipped to an intra-day low of 38.60 yesterday before closing at 38.50-55 following intervention by the Reserve Bank of India (RBI). The RBI reportedly bought around $50 million at the end of the day. Premia on the forward dealer continued to soften as the RBI intervened to sell around $150 million in the morning. The six-month premia closed at 6.07 per cent and the 12-month at 6.04 per cent.

The rupee opened at 38.28-38, stronger than Wednesdays close of 38.50-55. The market turned bearish on the dollar yesterday morning after the RBI announced a two percentage point hike in export credit to 15 per cent. The interest rate hike is expected to encourage exporters to remit their dollar proceeds. By 9:30 am, the rupee touched the intra-day high of 38.35.

However, Indian corporates appetite for dollars continued. For most of the day, there was substantial dollar demand. Most banks reported that it was corporates who were buying. However, they did admit that there was a lot of speculative trading also taking place.

The good demand situation in the market pushed the rupee down to 38.60 towards 4 pm. At this point, the RBI intervenes. As per the RBI spokesperson, the central bank was able to cause the rupee to recover to the close levels of 38.50-55 by 4:30 pm, the last deal being done at those levels with the State Bank of India (SBI).

Banks, however, maintain that the rupee closed at 4:00 pm at 38.60 and only a few stray deals were done since.

The RBI continued to intervene to soften the forward premia. This has ensured that the cost of forward dollars for corporates wanting to hedge their positions is not too high. In fact, in the morning, premiums softened below six per cent after the RBI intervened but then firmed up slightly on corporate forward dollar buying.

While banks feel that a substantial amount of corporate demand has already been met, they expect the buying interest to continue for the next few days as corporates may require dollars for any month end commitments. However, the market is beginning to feel that the depreciation may be coming to an end. While there may not be much of a recovery, the rupee could settle at these levels.

The supply of dollars in the market is fairly normal although it is not matching demand. Market players say that while inflows from foreign institutional investors have slowed down, they are likely to pick up in January.

Moreover, other sources of dollar flows like external commercial borrowings and global depository receipts are expected to come in.