Huge dollar demand checks rupee146;s surge

After Wednesday8217;s surge, the rupee fell steeply on Thursday due to huge demand for the US dollar. The Indian currency declined by 1.7 per cent to 43.77

After Wednesday8217;s surge, the rupee fell steeply on Thursday due to huge demand for the US dollar. The Indian currency declined by 1.7 per cent to 43.77, posting its biggest single-day percentage loss in nearly nine years, on suspected RBI intervention and short-covering of dollar positions after the Indian unit had risen to a 7-year high on Wednesday.

Dealers said a further rise in the rupee would have severely affected exports. Moreover, month-end dollar buying by oil companies also pushed the rupee to its lowest close in more than a week. The rupee ended at 43.770/785 per dollar, much weaker than Wednesday8217;s close of 43.04/05. It was the biggest percentage drop since May 14, 1998, when it had dropped 1.9 per cent.

The rupee has gained about 7.5 per cent since hitting a three-year low last July. It touched a peak of 43.01 during trade on Wednesday, its highest level since November 1999. 8220;The central bank might have sold the dollar through the banks,8221; said a dealer with a private bank.

8220;Everyone was expecting a correction to happen, though its speed was a little surprising,8221; added the dealer. Traders also said a shift in the settlement date for three-day forward contracts struck on Wednesday due to the end of the fiscal year was another reason behind the fall. The fiscal year ends on March 31.

8220;The premium was built into today8217;s rate as there is no settlement of currency deals on April 2 because of year-end account closing for banks,8221; a foreign bank trader said. Call money rates traded at 10-11 per cent on Thursday. They touched a decade high of 70 per cent last week, as banks faced an acute cash crunch following advance tax outflows of about 6.8 billion.

Standard Chartered said that while the rupee8217;s near-term strength may persist, it would fall to 45.50 by the end of June. 8220;The excessive strength in the rupee has been caused by a liquidity squeeze8230; as government expenditure seeps back into the system, liquidity is unlikely to tighten much further,8221; it said in a note on Thursday.

8220;Finally despite the fact that the RBI Reserve Bank of India has so far tolerated rupee appreciation, intervention is still possible,8221; it said.