The rupee recovered strongly against the US dollar on Monday, reflecting market comfort with the $1-trillion rescue package for troubled European nations.
The rupee closed at 44.86 to a dollar, a 1.36 per cent gain over the previous close of Rs 45.48, according to Bloomberg data.
Last week, the rupee had witnessed its biggest weekly fall (2.5 per cent) in 14 months.
Dealers said the market regarded the rescue package as a positive step. Asian markets set the tone for strong flows into capital markets, which turned the direction for the rupee.
The announcement of the rescue plan led the dollar to weaken against major currencies globally and helped local stock markets rebound.
The rupee rebound marks its return to the level it was trading against the greenback a few weeks ago. It had turned weak on rising concerns over spread of the Greece debt crisis to other European countries.
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BA Prabhakar, executive director with Bank of India, said the rupee came back to the original level (seen a few weeks ago). Flow of foreign money into both equity and debt markets has been strong. And, the Reserve Bank of India is not seen intervening strongly.
Indian shares ended up 3.4 per cent, after five straight days of fall. Most Asian currencies rose against the dollar.
The euro rose above $1.3 against the US dollar, after touching a 14-month low, as policy makers in the European Union agreed on a massive rescue package to stabilise the euro and euro zone central banks began buying local government debt.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange ended at 44.9250 and, on the MCX-SX, at 44.9200, with total traded volume on the two exchanges at $8.07 billion.
The flow of funds from foreign institutional investors into the Indian debt market since January 2010 has been strong. They have pumped in $5.49 billion since the beginning of the year, according to the Securities and Exchange Board of India data.
With huge liquidity pumped in to fight the financial crisis, the benchmark interest rates are ruling low. It is the interest rate differential on the financial instruments which is driving global fund managers to channelise funds in emerging markets like India for relatively better returns.
A head of a debt syndication outfit said the currency jumped the most, as policy makers in Europe pledged almost $1 trillion in loans to ease the debt crisis, encouraging investors to return to emerging-market assets. There will be a positive effect. If the rupee is going up against the dollar, more funds will come to India. And, if there was more liquidity, yields would soften, and that would bring more activity in the bond market, he added.
Bonds fall as EU deal dampens demand for safe-haven assets
Ten-year bonds fell, pushing yields to their highest level in almost a week, on speculation investors would favour assets offering better returns than government debt, as a crisis eases in Europe.
The MSCI Asia-Pacific Index of regional shares and the Mumbai Stock Exchange Sensitive Index both rose for the first time in six days after European leaders unveiled a loan package worth almost $1 trillion to head off the risk of default among the 16 nations using the euro. The Reserve Bank of India’s (RBI’s) plan to sell Rs 12,000 crore ($2.6 billion) of bonds this week also damped appetite for the nation’s debt.
The yield on the benchmark 7.8 per cent note due May 2020 rose two basis points to 7.68 per cent as of the 5:30 pm close in Mumbai, according to the central bank’s trading system. The price fell 0.30 per cent, or 30 paise per Rs 100 face amount, to Rs 100.80.
Call ends marginally down
The call money rate ended marginally down, as liquidity continued to remain ample in the banking system, dealers said.
One-day call rate ended at 3.75-3.85 per cent on Monday compared with Saturday’s close of 3.9-4.0 per cent for two-day loans.