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RBI suspected as rupee knocked lower

The Indian rupee falls sharply just as it gets knocked to a two-week low by suspected RBI intervention before a rising stock market.

business Updated: Jul 12, 2007 18:45 IST

The Indian rupee fell sharply on Thursday just as it looked set to test a nine-year high, knocked to a two-week low by suspected Reserve Bank of India (RBI) intervention before a rising stock market helped it regain some poise.

The partially convertible rupee ended at 40.50/51 per dollar, weaker than Wednesday's close of 40.40/41.

The rupee rose as far as 40.33, just shy of a nine-year high of 40.28 hit in May, but the sudden afternoon intervention pushed it down about 1 percent to a low of 40.75.

"The market was caught short (dollars) when the central bank came in around the 40.35-40.40 levels, and that sparked some frantic position covering," said a local trader.

Traders said the RBI may have bought up to $400 million to weaken the rupee.

"The Reserve Bank of India (RBI) does not comment on the day-to-day movement of the currency," a central bank spokeswoman said.

The central bank had bought $2.1 billion through currency market intervention in April, the latest data shows, and bought $24 billion in the six months to end-April trying to stem the rupee's rise.

Traders said the central bank has been selling rupees over the past month as it has headed back towards its May highs.

Indian shares ended up 1.2 per cent at a record close on Thursday. The stock market has risen nearly 10 per cent so far this year, following a 47 per cent rise in 2006.

That has helped attract investors to the fast-growing economy. The foreign inflows have pushed the rupee up by about 9 per cent so far in 2007, putting pressure on exporters' margins.

Infosys Technologies, India's number-two software exporter, on Wednesday cut its full-year earnings forecast and said the currency's sharp rise was hurting its operating margins.

Foreigners have bought shares worth more than $7.5 billion so far in 2007, compared with $8 billion for the whole of 2006.

RBI Governor Yaga Venugopal Reddy said earlier this month the central bank was facing severe policy challenges in managing capital flows, and analysts expect overseas borrowings regulations to be tightened to help curb inflows.