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RBI steps in to tame rupee

The RBI intervenes in the forex market to pull down the rupee from its eight-year high, reports Suman Layak.

business Updated: Apr 04, 2007 21:23 IST

The Reserve Bank of India intervened in the forex market to pull down the rupee from an eight-year high (42.845 to a dollar) it touched on Wednesday afternoon. The rupee closed at 43.15 to a dollar, which is lower than Tuesday’s close of 43.06.

Forex dealers said the intervention came through nationalised banks and public sector oil companies late in the afternoon.

The rupee climbed in the morning, mainly due to the huge difference between overseas rupee futures and the domestic dollar-rupee rate, because of which a lot of dollars were sold in the domestic market. The sales led to the disappearance of the difference.

Ajay Mahajan, chief of financial markets at Yes Bank said: “There was some hedging by the oil companies and the nationalised banks were also active. Equity markets had gone up all over the world yesterday and this led to currencies in all these markets strengthening against the dollar.”

The rupee strengthened beyond 43 to the dollar for the first time since June 1999 as banks sold dollars to avoid borrowing rupees in the overnight market, where interest rates have surged to a decade-high. Indian banks must set aside as much as 6 per cent of deposits daily to meet the central bank’s cash reserve requirements and this will rise to 6.5 per cent later this month.

Gaurav Kapur, senior economist with ABN Amro Bank said: "I was expecting a major intervention by the RBI after the cash reserve ratio and the repo rate were hiked. The bank was preparing the ground for an intervention and we saw the intervention happening today."

A stronger rupee makes Indian goods and services costlier, thereby making Indian companies less competitive abroad. There has been speculation for some time about the RBI intervening to bring the rupee down.

First Published: Apr 04, 2007 20:56 IST