Rupee erased all gains to end down against the US dollar on Monday as banks continuously bought greenback to meet the strong demand from importers, dealers said.
However, dollar sales from government-owned banks, presumably on behalf of the Reserve Bank of India (RBI), prevented the rupee from falling sharply below the psychological Rs 49 a dollar level, dealers said.
“There was strong dollar demand from importers and the rupee was dragged down. Supply from exporters was also not there,” said a dealer at a UK bank.
According to dealers, a large state-owned bank persistently bought greenback to make defence-related payments. The state-owned bank continuously bought dollars between Rs 48.75 and Rs 48.95 per $1 range , dealers said.
A dealer from a south-based state-run bank also bought $200 million for a government-owned company between Rs 48.70 and Rs 48.84 per $1 level. Some banks also bought dollars, noting local share indices came off its highs, dealers said.
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So far in October, foreign funds have been net sellers of shares to the extent of $2.68 billion, while they sold $215.10 million of equities on Friday.
In early trade, the rupee had risen to an intraday high of Rs 48.68 per $1 as most banks sold greenback, noting the rise in Asian currencies such as Korean won, Indonesian ringgit, and Malaysian ringgit against the US dollar.
The rupee had risen to 48.68 per $1 levels on the back of such selling. However, it erased some of these early gains to Rs 48.79/$1 on dollar demand from importers, dealers said.
It soon bounced back to Rs 48.71/$1 tracking the knee-jerk 6 per cent rise in local shares after the RBI cut repo rate by 100 bps to 8 per cent with immediate effect.
“Technically, local currency should not appreciate on a repo rate cut. But, as shares rose significantly, the sentiment for the rupee automatically changed,” said a dealer at a US bank.
“I expect the RBI to cut interest rate at its monetary policy on Friday by another 50 basis points and rupee may continue to remain under pressure,” said Sailesh K Jha, senior regional economist at Barclays Capital, based in Singapore.
But gains made by the rupee did not last long as shares gave up gains, while it also fell back to 48.81/$1.