Rupee hits 9-year high

The spot rupee closed at a nine-year high of 40.19/20 after the Sensex rose to a record, stoking optimism that overseas funds will buy more emerging-market assets as the better-than-expected 50 basis point cut in short-term interest rates by the US Federal Reserve helps ease a global credit shortage.

The spot rupee had closed at 40.20 in May 1998. On Tuesday, it opened 20 paise higher at 40.28 after closing at 40.48. "The Fed rate cut was a signal of easy liquidity to combat the problem of subprime crisis," said a dealer.

The rise in the equity markets led to heavy dollar selling by foreign banks on behalf of their foreign institutional investors clients. On the other hand, the Reserve Bank of India was seen intervening in the market to stem the rupee appreciation.

According to a chief dealer in a public sector bank, the rupee appreciating to 40.20 to a dollar was a knee-jerk reaction to the developments in the equity market. It will soon come back to 40.50, given the demand from oil companies to cover imports, especially at a time when crude is over $80 per barrel, he predicted.

However, the rupee premium paid on forward dollars rose due to a widening interest rate differential between India and the US after the Fed rate cut. The annualised premium on the six month and one year forward dollars closed at 2 per cent and 2.04 per cent, respectively as against 1.73 per cent and 1.78 per cent on Tuesday.

Asian also currencies reacted strongly today, the rupiah, peso and ringgit rising the most against the dollar. The rupiah jumped by 1.8 per cent to about 9,220 a dollar, while the peso shot up by nearly 1.3 per cent to 45.55 a dollar. The ringgit, which usually moves in tandem with the high-yielders, rose by about 1 per cent versus the dollar.

These currencies had fallen sharply at the height of global credit market turmoil as investors unwound the so-called carry trade, in which low-yielding currencies were used to fund investments in high-yielding assets.