Rupee dips on intervention fears

The rupee dropped a second day on speculation the central bank will sell it to curb gains after the currency rose 6 percent in the past six months.

The rupee is overvalued against a basket of currencies of its main trading partners by 8.53 per cent, near the highest in 10 months, according to an index maintained by JPMorgan Chase & Co.

A stronger rupee helps widen the trade deficit by encouraging imports and making the country's goods more expensive abroad.

"Any speculation of the central bank's presence in the market is enough to weaken the currency,'' said Rohan Lasrado, a trader at HDFC Bank in Mumbai. "When this starts gaining momentum, traders would prefer to go long on dollars.''

The rupee fell 0.1 per cent to 4.2875 against the dollar at 5 p.m. in Mumbai, from 44.2388 yesterday, according to data compiled by Bloomberg. It closed at 44.185 on January 17, the highest in almost a year.

The central bank doesn't comment on daily market operations, said Reserve Bank of India spokeswoman Alpana Killawala in Mumbai.

The gap between India's exports and imports was near a record $6.2 billion in November as the cost of shipments from abroad rose 43 per cent to $15.9 billion, according to data provided by the ministry of commerce and industry. The government this week is scheduled to release the data for December.

Commerce Minister Kamal Nath wants exports to grow 25 per cent to $126 billion in the fiscal year ending March 31, and to $165 billion by March 2010.

The rupee's decline was moderated by expectations capital flows from abroad will increase as India opens up its debt market to overseas investors, and global funds increase the purchase of equities.

"My bias is in favour of the rupee,'' said Roy Paul, a currency trader at Federal Bank Ltd. "We can see a lot more inflows than before.''