Indian rupee goes highest for the month as RBI effort yields fruit

The Reserve Bank of India has taken new steps on Tuesday to support the rupee.

Written by Reuters | Mumbai | Published: July 24, 2013 5:39:57 pm

The Indian rupee posted its biggest single-day gain in nearly a month on Wednesday as the Reserve Bank of India (RBI) renewed efforts to shore up the currency by tightening cash conditions began to yield results. The RBI took new steps on Tuesday to support the rupee,including making it even harder for lenders to access funds with measures such as lowering the amount banks can borrow under its daily liquidity window.

The efforts signal the RBI will stay the course with its defence of the currency despite the risks to economic growth. (For full wrapup of the day’s events see ) “I think these measures will stay in place for at least three to four months. These are not temporary,” said Param Sarma,chief executive at NSP Forex. “These steps will only eliminate volatility from the market but for real appreciation bias to set in we need real flows,which can come in through an overseas bond sale. The rupee will hold between 58.50-60 band as long as these measures stay,”.

The partially convertible rupee closed at 59.13/14 per dollar compared with 59.76/77 on Tuesday. It rose to as high as 59.0150,its strongest since July 1. The unit gained 1.1 percent on the day,its biggest single-day gain since June 28. Rates and equity markets,however,reacted negatively to the further tightening of liquidity with the benchmark 10-year bond yield rising to a 14-month high of 8.50 percent while the 1-year overnight swap rate rose to a near 5-year peak. Traders will continue to monitor any comments from policymakers for near-term direction.

“Rupee is likely to strengthen further towards 58-57 levels in the coming days as the central bank’s actions are giving some strength to the local currency,” the head of foreign exchange trading at a private bank said. Expectations of further tightening of domestic rupee liquidity pushed up onshore forward rates. The one-year onshore forward premium rose as high as 518.75 points,its highest since August 1998.

Traders said the spot rupee was also helped by some long unwinding seen in the offshore non-deliverable forwards. The one-month NDF contract was at 59.57 while the three-month was at 60.46. In the currency futures market,the most-traded near-month dollar/rupee contracts on the National Stock Exchange,the MCX-SX and the United Stock Exchange all closed around 59.13 with a total traded volume of $3.3 billion.

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