Rupee drops most in 6 weeks on speculation

Rupee dropped the most in six weeks on speculation importers used the local currency's recent gain to exchange it for dollars to pay for goods from abroad.

The rupee rallied for nine weeks through May 4, its best run since May 2003, due to increased capital flows. The currency extended gains earlier this week to the highest in almost nine years. A stronger rupee means importers have to convert less to purchase foreign exchange.

"The rupee has lost steam due to the dollar demand from importers,'' said V Rajagopal, chief currency trader at Kotak Mahindra Bank in Mumbai. "A view is emerging that the rupee has peaked for the time being.''

The rupee fell 0.9 per cent to 41.26 against the dollar as of the 5 pm close in Mumbai, according to data compiled by Bloomberg. This is the currency's weakest since April 23. It rose as high as 40.545 on May 7, the strongest since May 1998.

The nation's economic growth, running at the fastest pace in two decades, suggests consumers are spending more on goods from abroad. Any savings in costs of buying foreign currency are important as India meets three-quarters of its annual energy needs from abroad.

The rupee has advanced 6.8 per cent this year. India's imports rose to $181.3 billion in the fiscal year ended March from $140.2 billion in the previous year, the government said on May 1.

The rupee's drop was limited by speculation overseas companies will invest in India as economic growth accelerates.

"We expect the rupee's fall to be temporary,'' said R V S Sridhar, vice president of treasury at UTI Bank in Mumbai.

Call rates fall below 1%

The interbank call rates fell to a low of 1 per cent on the back of excess liquidity in the market. The Reserve Bank of India (RBI) received bids worth Rs 34,495 crore under its reverse repo mechanism to absorb surplus liquidity.

The liquidity has increased on the back of government expenditure, coupon redemption and intervention by the RBI in the foreign exchange market to stem rupee appreciation.

The spot rupee fell from an opening of 40.94/96 to close at 41.28/30 on Thursday following heavy dollar demand from oil companies and banks.