29.7.11

The Rupee rallies

The Indian rupee rallied to a three-year high in intra-day trade on Wednesday, a day after RBI hiked the key policy rates by 50 basis points (100 basis points = 1%), but closed off that mark as the share market weakened, triggering fears of foreign fund selling. The rupee opened at 44.09 to a dollar on expectations that the higher rate in the economy will attract foreign funds to buy more bonds, which in turn would help the rupee strengthen. In intra-day trade, after breaking the 44 barrier, the rupee strengthened further to 43.85, but again came down sharply in late session to close at 44.08. Compared to this, on Tuesday, the rupee had closed at 44.18. The high volatility during the day’s session also led to record turnover in the currency derivatives segment with the total turnover on the three bourses—NSE, MCX-SX and USE—crossing the Rs 1 lakh crore mark for the first time ever. At close, the total turnover was Rs 1.09 lakh crore. Market players said a combination of reasons led to this record turnover. For one, it was the day of expiration of the July contracts, and usually on such days turnover tends to shoot up. Additionally, “with the rise in turnover, the depth and liquidity in the currency derivatives market is also increasing, which is attracting more trading”, a former currency trader pointed out. The increasing acceptability of currency derivative products as a good asset class is also leading to higher volumes, market players said. In the spot market, the strength of the rupee in early trades were mainly on the back of huge arbitrage opportunity between the non-delivery market in Singapore and the Indian market, dealers said. But as the rupee strengthened to trade at the 43.85 level in the second half, there was buying from some of the PSU banks, which dealers suspected to be on behalf of RBI. Going forward, local dealers said that despite the current weakness in the equity market, there could be some strength in the rupee because now FIIs have much higher limit than ever to invest in the debt market.

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