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RBI steps in after rupee falls to 10-month low

A broad-based dollar rally across markets, arbitrage between the onshore and unregulated offshore markets pushed the rupee to a ten-month intraday low on May 29.

, ET Bureau|
Updated: May 30, 2013, 06.20 AM IST
MUMBAI: The Reserve Bank of India stepped in to prop up the rupee after it fell to a 10-month low to the dollar on Wednesday, according to bank dealers. This, coupled with the strengthening of the euro after a report showed business confidence in Germany unexpectedly rose for the first time in three months in May, helped the rupee recoup 18 paise before closing 0.5% down from its previous close.

A broad-based dollar rally across markets, arbitrage between the onshore and unregulated offshore markets, and month-end demand for dollars from defence and oil companies pushed the rupee to a ten-month intraday low on May 29. The currency closed at 56.17 to the dollar after hitting a 10-month low of 56.35 earlier in the day following the strengthening of the euro.

Traders may have taken cues from the central bank's actions a few months ago. "The market participants may interpret RBI having bought dollars in March (to replenish the reserve) as a signal of giving a floor to the rupee level," said Partha Bhattacharyya, deputy CEO, Mecklai Financial. "Coupled with this and genuine dollar demand from oil companies and defence, recent uncertainties on Fed unwinding of QE have led to the pressure on rupee."

The dollar began rallying against other currencies after minutes of the Fed's latest meeting released last week showed many of the agency's members were in favour of scaling back the purchase of bonds worth $85 billion a month if the US economy maintained its momentum.

It gained further traction against the yen and euro after data on Tuesday showed US consumer confidence rose to 76.2, its highest level since February 2008, from 69 in April. All these events strengthened the dollar versus the rupee in the unregulated offshore or non-deliverable forwards (NDF) market. The stronger dollar in NDF created an arbitrage opportunity - wherein corporate treasuries and banks' proprietary desks buy the dollar on the over-the-counter market or on the futures market here and sell it on the NDF market. This increases pressure on the rupee.

With May 29 being the expiry of currency futures traded on NSE and MCX-SX, the rupee volatility increased. This is because traders who have purchased the dollar here allow their positions to expire, while squaring off that on the NDF market.

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