Rupee plunges on capital outflows

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Fall*

Jul 04,199126.283.16 Jul 02,199123.091.96 Mar 01,199332.11.9 Mar 04,199227.91.6 Feb 05,199637.91.16 Sep 14,199533.951.1 Feb 20,1992271.09 May 14,199840.540.77 Mar 29,200743.750.7 Mar 18,199634.90.7 * over previous close   Source : Bloomberg
"The sentiment is negative for the rupee on all fronts,'' said L V Prasad, chief currency trader at IndusInd Bank in Mumbai. "Stocks have been down and the capital outflows, combined with high oil prices, have the potential to weaken the rupee further.''

The currency extended its southward journey deeper after the Reserve Bank of India (RBI) let it fend for itself on the ground that it was mainly offshore arbitrage demand and not local importer demand that was dragging the currency down today, dealers said.

 Most banks entered long positions in the local spot market to sell in the non-deliverable forward (NDF) market, where the rupee had fallen sharply amid weak sentiment caused also by firm crude oil prices and shrinking balance of payment surplus.  RBI was conspicuous with its show of restraint even as the rupee fell to an intraday low of 43.47, its lowest so far in 2008. Most currency traders were surprised that RBI didn't actively sell dollars, like it did until last week.  In one hour to the closing bell, the rupee, however, managed to rise from its lows, helped by dollar sales by a very large private bank.  This bank is speculated to have sold about $150 million between 43.30 and 43.43 to a dollar.  "Some banks had gone excessively long on dollars, so they just squared their positions. Nationalised banks also sold dollars at lower rupee levels," said the head of FX trading at a large private bank.  "We have seen these levels nearly after a gap of one year, so banks sold the greenback and booked profits," said a dealer with a state-run bank, noting that the rupee closed at a 15-month low against the greenback.  While most dealers said they did not see a compelling reason for RBI to move to the fringes, a few of them said RBI did not want to supply dollars because the fall was mostly because of offshore-onshore arbitrage.  It is likely that the central bank may be expecting rupee to climb back once the arbitrage window shrinks.  "Most foreign banks were buying dollars in spot market and selling it offshore. The one-month spread was about 25 paise in the NDF (non-deliverable forward) market," said a dealer with a European bank.  According to dealers, very large UK and US banks were major buyers of dollars today.