Rupee soars to 3-week high on CRR hike

MARKET ROUND-UP

Rupee rose the most in three weeks on speculation lenders are selling dollars to raise cash after the central bank yesterday told them to set aside more money to cover deposits.

The Reserve Bank of India yesterday raised the cash reserve ratio by half a percentage for the second time in two months to curb inflation fuelled by excess funds in the banking system.

Banks that are left with fewer funds after the central bank's last decision in December sold dollars spurring the rupee, said Vikas Babu, a trader at state-owned Andhra Bank in Mumbai.

"Some banks are selling dollars to raise money as they move toward tighter liquidity conditions, and we see the rupee strengthening slightly because of that,'' he said.

The local currency climbed 0.2 per cent to 44.1338 against the dollar at the 5 pm close of trading in Mumbai, from 44.2062 yesterday, according to data compiled by Bloomberg.

The central bank said lenders need to set aside as cash, 5.75 per cent of their deposits starting February 17, and 6 per cent starting March 3.

The move will drain as much as Rs 14,000 crore ($3.17 billion) from the banking system, according to the central bank.

It cited a faster pace of growth and accelerating inflation for the decision, and also said its policies are "vigilant to any indications of volatility in currency and money markets''.

Governor Yaga Venugopal Reddy wants to manage increasing rupee funds resulting from its intervention in the currency market as capital inflows increase, said Rajeev Malik, an economist at JPMorgan Chase & Co in Singapore.

The central bank arranges purchases or sales of foreign exchange to influence the rupee's value.

"The central bank prefers to avoid excessive appreciation of the rupee,'' Malik said. "The key trigger is the magnitude of capital flows'' putting pressure on the currency.

The rupee last week rose to a 16-month high as purchases of Indian equities by global funds pushed the benchmark stock index to a record, following a 24 per cent gain in the past six months.

The Sensex extended losses for a fourth day, the longest declining streak in a month, following the central bank's decision. The forwards market, where investors can hedge their currency risk, shows the rupee will weaken to 45.58 in 12 months.