Re ends unchanged as RBI intervenes

MARKET ROUND-UP

Rupee closed little changed on speculation the central bank is selling it to curb gains following the currency's climb to a 16-month high this week.

The central bank, which on January 31 said it would remain "vigilant'' about volatility in the currency market, may be concerned a stronger rupee will widen the trade deficit by fuelling imports and slowing exports. The rupee also may slip, as some refiners sell on speculation the currency won't extend its 5.4 per cent advance in the past six months.

"It seems the authorities aren't letting it strengthen much,'' said Paresh Nayar, chief trader at Development Credit Bank in Mumbai. "We've seen that happen in the past few days. We can see some oil companies buying dollars as well.''

The rupee traded at 44.1237 against the dollar at the 5 pm close in Mumbai, versus 44.1263 yesterday.

A stronger currency works against the central bank's efforts at narrowing the current-account deficit, which widened to $11.7 billion in the six months through September 2006, from $7.2 billion a year earlier.

The central bank doesn't comment on daily operations, spokeswoman Alpana Killawala said.

The central bank may also be selling rupees to provide funds to the local banking system before a scheduled government auction of Rs 9,000 crore ($2 billion) of bonds tomorrow, Nayar said.

The central bank in December decided to raise the amount of cash lenders must set aside to cover deposits to curb money supply, which was identified as a factor stoking inflation. The measure left banks, the biggest buyers of debt, with fewer funds.

Purchase of dollars by the central bank may help shore up rupee-funds in the banking system, Nayar said. Lenders didn't borrow from the central bank today after depending on the monetary authority's funds for short-term needs for 20 straight days.

"We'll know the real intention of the authorities when this auction is over,'' he said.

The currency, the fourth-best performer in Asia in the past six months, completed six months of gains, as unprecedented growth lures investment from overseas companies and funds. The government-run Central Statistical Organisation yesterday said it expects the $854 billion economy to expand at 9.2 per cent in the year ending March 31, following a record 9 per cent growth last year.

The rupee weakened in the forwards market. Investors who want to buy forward contracts to purchase dollars a year from now using rupees need to pay 2.99 per cent more than the exchange rate in the cash market, compared with 2.91 per cent yesterday.