Re rises on dollar flows

 Strong foreign exchange inflows pushed the rupee-dollar exchange rate to close at a two-month high of 42.08-09 to a dollar after opening at 42.45 on Wednesday.

According to dealers, the spot rupee gained around 1.6 per cent over Tuesday's close of 42.74-75. It opened higher at 42.45 on Wednesday as the market had already factored in the United Progressive Alliance (UPA) government's trust vote victory.

Dealers said custodians (foreign institutional investors) had already pumped in dollars into the country on Tuesday, which were sold on Wednesday by foreign banks across the board. The dollar supply from foreign investors was further coupled with dollar selling by exporters, who panicked with a sharp appreciation of the rupee within a day.

Dealers estimated that around $1-1.5 billion were sold in the Indian foreign exchange market on Wednesday. "What complemented the trigger of the UPA victory was global crude prices falling from highs of $147 a barrel to a low of $125 a barrel and the Indian equity market (the BSE Sensex) moving up by 840 points," said a dealer.

 Dealers said forex inflows would continue if crude oil prices continued to soften and global equity markets recovered. Only then will foreign investors look for avenues to earn higher returns and turn to emerging markets rather than worrying about the dollar liquidity, they added.  "This week, the rupee is expected to breach 42 and rule in a band of 41.95-41.98 to a dollar before slipping back to 42 to a dollar," said a dealer.  While exporters are expected to book fresh contracts at these new levels, they will continue to sell dollars if the rupee appreciates. Importers will wait and watch before booking long-term contracts for import payments, said a dealer.  The bullish sentiment on the dollar and the rupee and the dollar supply from exporters eased the rupee premia to be paid for booking dollars. The annualised premia for six-month and one-year forward dollars closed at 4.60 per cent and 3.95 per cent as against 5.13 per cent and 4.32 per cent respectively on Tuesday.