Rupee breaches 45-mark despite RBI intervention

Rupee breaches 45-mark despite RBI intervention MUMBAI : After nudging the 45-level for over a week, the rupee finally breached the resistance level on Wednesday, with the dollar regaining its lost ground against most currencies after the Fannie Mae-Freddie Mac bailout this week.  The domestic currency also came under pressure on sales by foreign institutional investors and comments by new RBI governor D Subbarao that the rupee cannot defy economic fundamentals.  The rupee slumped to its lowest level in almost two years on Wednesday, after stock losses in local and other Asian markets.  However, central bank intervention through the day halted rupee’s fall at the 45.20-mark. It finally ended the day 45.12/13 against the dollar, weakening from Tuesday’s close of 44.84/85.  Sentiment for the local unit continues to be heavily bearish. “There are a number of factors that are pressurising the rupee at present; the dollar has strengthened considerably, equities are weak, and the current account deficit continues to remain high.  There has been no real comfort for the rupee, in spite of crude prices coming down in the past few days,” said Agam Gupta, Standard Chartered Bank head of forex and derivatives trading for South Asia. In fact, the fall in crude prices has bolstered the dollar against other currencies as the US is the major oil importer.  The rupee, at its low on Wednesday, had lost over 2% this month and almost 11% in the year so far. This is in sharp contrast to last year’s 12% rise.  According to market participants, there was constant demand for dollars from foreign banks. Foreign banks often buy dollars in the local spot market and simultaneously sell them in the overseas non-deliverable forwards market, in an attempt to arbitrage the price differential. One-month offshore NDF contracts quoted at 45.26/36-levels, lower than the spot levels.  Other importers like oil companies and big corporates were also seen buying dollars. Nationalised banks began selling dollars once the rupee crossed the 45.10-mark.  “However, there was heavy dollar demand through the day, and the rupee ended the day below the 45-mark, in spite of considerable central bank intervention,” said Paresh Nayar, chief dealer at Development Credit Bank.  On Tuesday, the RBI governor had said that central bank’s policy was not to take a view on the exchange rate, but only to try and prevent volatility in the market in a flexible and liquid manner.  “It is evident that RBI is not protecting any particular level as such by intervening. Its primary objective is to shield the market from steep falls,” added a trader with a leading private bank.  In the bond market, securities lost early gains, as cash conditions came under strain. Bond prices rose during early trade, as dealers derived positives from RBI governor’s statements on Tuesday that inflation was showing signs of moderation. However, the second-half of trade gave rise to concerns that cash conditions would go through a squeeze shortly, given the amount of auctions scheduled for this week, and that corporates will start making their advance tax payments from next week.  Yields on the 10-year benchmark bond, the 8.24% bond maturing in 2018, ended the day at 8.37%, two notches below Tuesday’s close of 8.39%. Yields had dipped to a low of 8.30% during early trade.  A senior dealer from a bond house said, “The market sentiment is pretty cautious at present. Crude prices have dropped and inflation may be on the decline, but there are concerns of liquidity going under a strain now.”  RBI auctioned treasury bills worth Rs 9,000 crore with two separate tenures on Wednesday, and declared bullish cut-offs of 8.72% on the 91-day T-bill and 8.86% on the 364-day T-bill.