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Despite strong inflows in domestic markets by foreign institutional investors (FIIs) and lower crude oil prices, the rupee is set to weaken against the dollar in the near term.
A slight hint by US Federal Reserve chairman Ben Bernanke yesterday on unwinding the bond buying programme known as Quantitative Easing 3 (QE3) resulted in the rupee's fall against the dollar.
Bernanke said the American economy still needed aid, and premature scaling down of the bond buying programme could lead to the substantial risk of slowing or ending the economic recovery.
However, he also said the Fed was ready to taper its bond buying programme in the coming months if the housing sector and labour market continued to show strong signs of growth.
"The Fed chief talked about possible discussion on possible withdrawal of QE. At the same time, some of the members of the Federal Open Market Committee expressed concern on the risk of frothiness in the US financial markets. These comments triggered a reversal in the US equity markets," said Anindya Banerjee, currency analyst, Kotak Securities.
He said once Asian markets opened on Thursday, the Japanese bond market, second largest in the world, had to be halted due to excessive volatility. And, China's manufacturing sector survey pointed to a contraction. These developments triggered a sharp rise in the dollar/yen, triggering a sell-off in the Japanese equity markets, which came down a little over seven per cent. As a result, the rupee depreciated towards Rs 56.01, due to significant unwinding of long positions in the currency.
The rupee ended at Rs 55.59 on Thursday; yesterday's close was Rs 55.48. It had opened at Rs 55.78 and during intra-day trades, had touched a high of Rs 55.55 and a low of Rs 55.48.
"While the stakeholders are comfortable with a medium term trading range of Rs 53-56 a dollar, intra-May weakness in the rupee from Rs 53.66 to Rs 56.01 by 4.35 per cent has caught all on the wrong foot," said
J Moses Harding, head of the asset/liability committee at IndusInd Bank.
The rupee touching 57 to the dollar seems very close for the Street. "By end-June we can also see the rupee touching 57," said Pramit Brahmbhatt, chief executive officer, Alpari Financial Services.
FIIs invested $924.9 million on Thursday, compared with $293.2 mn yesterday, showed data from the Securities and Exchange Board of India.
