Re recovers as banks unwind long $ positions

The rupee recouped all losses to end flat against the US currency Monday as dollar sales by state-owned banks on behalf of the Reserve Bank of India prompted banks to unwind long dollar positions.

The rupee had weakened to a 5-month low owing to continuous dollar demand following a sharp fall in the local stock market.

The rupee was 45.5600 per $1, flat from 45.5550 Friday. It had touched a 5-month low of 45.8100 today.

"Nationalised banks were protecting the rupee, so naturally other banks had to cut positions because the dollar was not expected to weaken," said a dealer with an private bank.

State-owned banks sold at least $200 million today to support the rupee, dealers said.

"It has also been noticed that the market some times opens with even a 10-paisa gap, which makes it too risky to carry dollar positions overnight. So, banks are cutting positions," said a dealer with an U.S. bank.

Earlier, a never-before-seen fall in the local stock market had led to heavy dollar demand from banks on fears foreign funds will pull out from India.

Equities fell for the fourth day in a row, ending 4-5 per cent lower, after falling 10 per cent at one stage. Trading was suspended for an hour as key indices touched the lower end of the first intra-day circuit filter of 10 per cent.

This is only the second instance in the history of the Indian stock markets when trading was suspended for an hour in the face of massive selling pressure. Trade in the stock market was last suspended two years back on May 17, 2004.

Forward dollar/rupee premiums ended off highs as banks sold forward dollars in the later part of trade due to the recovery in spot rupee.