Rupee slips to 16-month low

Dealers said several banks and corporates were caught off guard because a prolonged bout of rupee stability had fostered some complacency covering forward dollar demand. Analysts said, while the timing surprised the market, the weakness had been on the cards for a while.

Weekend border clashes between Indian and Pakistani soldiers in Kashmir also led to early dollar bids by some corporates based in Northern India. V Ravikumar, chief dealer at ABN Amro Bank, said the clashes, in which soldiers on both sides were killed, triggered some pent-up dollar demand. "There has been some import covering by some customers sitting short while dollar supplies have not been encouraging," he said.

Dealers said slow dollar inflows since the start of the year and a negative trend in foreign investment flows had weighed on the currency. Data released by the Securities and Exchange Board of India (SEBI) showed foreign investors sold a net $76.1 million in the three weeks to January 21, as funds shuffled their portfolios, booking profits on high-flying software stocks.

Analysts said some of the dollar buying was probably to pay for oil imports, as crude prices hit nine-year highs last week after some OPEC countries curbed output at a time when North America could face a prolonged winter. But, analysts did not expect the rupee’s weakness to last long.

"The current bout of weakness should not be construed as a pre-cursor to an accelerated test of 43.75 or beyond," said Vasan Sridharan, treasury economist at Standard Chartered Bank. Sridharan said the rupee was still 2.8 per cent weaker than it was in 1993/94, based on a four-currency real effective exchange rate model monitored by the central bank.

Forward dollar premiums tracked the spot rate. Six-month premiums were quoted at an annualised 3.19 per cent off the earlier high of 3.25 and compared with Friday’s close of 3.13.