Re soars as banks sell $ to meet CRR needs

MARKET ROUND-UP

The rupee rose, the biggest fluctuation of any currency today, as lenders sold dollars to meet new reserve requirements from the central bank.

The rupee approached the strongest since June 1999 after the Reserve Bank of India increased the amount of funds banks must set aside for the third time in as many months. Policy makers are striving to rein in inflation from the fastest in two years. Overnight interest rates at a decade high are discouraging banks from borrowing rupees in the money market.

"Selling dollars is a preferred option since the cost of rupee resources is high and difficult,'' Rohan Lasrado, a currency trader at HDFC Bank, said in Mumbai. "The rupee may gain further as liquidity tightness doesn't appear to be easing anytime soon.''

The rupee surged 1 per cent to 43.075 against the dollar as of the 5 pm close in Mumbai, according to data compiled by Bloomberg. The gain was the highest since June 2. The currency climbed to 43.05, near the 43.025 reached on March 28, which was the strongest since June 10, 1999.

Today was the first day of trading since the rate increase as bond and currency markets were closed yesterday.

Lenders will have to set aside 6.5 per cent of their deposits in cash starting April 14, compared with 6 per cent at present, the Reserve Bank said after markets closed on March 30.

The measure will drain Rs 15,500 crore from the banking system, the central bank said.

The monetary authority also increased the rate at which it lends to banks overnight by a quarter-percentage to 7.75 per cent to curb loan growth that has fuelled inflation.

Goldman Sachs group, the world's biggest securities firm by market value, reversed its previous call for the rupee to weaken after the unexpected rate increases.

"We expect the rupee to benefit both from rising rates and the shift in the policy focus of the central bank,'' the Goldman strategists wrote in a note to their clients. The RBI's focus on inflation is "implying that it may be willing to tolerate a higher rupee''.

Goldman recommended buying the Indian currency on speculation rising interest rates will make it more attractive for domestic companies to borrow abroad and convert the proceeds into the local currency.

Volatility on one-month rupee options was held near the highest this year as traders bought protection on a further advance in the currency.

The gains in the currency were moderated by speculation the rise in crude oil prices will prompt importers such as Indian Oil Corporation, the nation's largest refiner, to buy dollars.

"The rupee's rise provides an opportunity for refiners to buy dollars given that crude is becoming more expensive,'' said Paresh Nayar, head of bond and currency trading at Development Credit Bank in Mumbai. "There are more reasons for the rupee to decline now than we have seen in the recent past.''

Strength in the rupee means less of the local currency has to be converted by importers. India imports three-quarters of its annual oil requirement.

Crude oil for May delivery touched $68.09 a barrel last week on the New York Mercantile Exchange, the highest since September 6. Prices increased after the seizure of 15 British sailors and marines by Iran, the world's fourth-biggest oil producer, raised concern that regional supplies might be disrupted. Crude oil was at $65.87 in after-hours trading.

The world's biggest movers are based on changes in price yield and are screened for the size of the market and amount of daily trading.