Month-end dollar purchase by oil companies coupled with short covering by banks saw the rupee drop against the greenback after an eight-week rally. A weakness in the equity markets also affected the rupee.
"Though the rupee looked overvalued, Monday's move was surprising. Genuine buying and selling happen gradually, but this one was swift, which indicates that there was some quick short covering or RBI intervention," says S Sundar, CEO of Panassia iRisk Consulting, a Mumbai-based corporate hedging consultant.
The rupee resumed on Monday on a weak note at 41.10/12 from Friday's close of 41.085/100 against the dollar. As per the data compiled by Bloomberg, the rupee fell to 41.3550 against the dollar at 10.30 am, marking the biggest drop since March 29. At 5 pm, the rupee stood at 41.19 against the dollar.
Though the rupee's rise to the highest in nine years helps the country, which is meets 75 per cent of its energy requirements through imports reduce expenditure, analysts opine this could be the end of rupee's strengthening phase.
They think the Reserve Bank of India, which recently intervened and increased short-term rates and reserve requirements to curb inflation, thus giving strength to the rupee, would abstain from doing so going forward.
"Inflation would cool off by say May end in the range of 5 to 5.5 per cent. By the same time, foreign currency inflow may dry up a little bit and the rupee is expected to retrace 43-44 levels against the dollar.
Those who hold positions are advised not to make any decision based on the recent trend," says Abheek Barua, chief economist of ABN Amro bank.
He expects the current account deficit of the country to moderate by June. Hence, it will be time for the RBI to look at export competitiveness and the rupee's external value than domestic issues such as inflation, he says.
With the country's economy growing at the highest rate in two decades, consumers are spending more on foreign goods thus widening the current account deficit, which is a yardstick of domestic currency's strength.
A huge current account deficit pushes down the nation's currency. India's current account deficit was $ 3.04 billion in the fiscal third quarter through December 31, according to the central bank.
India's current account deficit was $3.04 billion in the fiscal third quarter through December 31, according to the central bank.
The rupee's rise to the highest since 1998 saves costs for companies such as Indian Oil Corp, the nation's largest refiner, and Reliance Industries Ltd, the country's biggest company by market value, as they need less in exchange for their dollars. The currency dropped today to the lowest in almost a week.