Rupee loses on fears of importers' dollar buy

MARKET ROUND-UP

Rupee reached its lowest in a week on speculation importers will sell the currency for dollars to pay month-end bills.

The currency fell a third day on concern the Reserve Bank of India will keep weakening the rupee to protect exporters, prompting some traders to buy dollars.

The rupee added to recent losses on speculation the currency's interest rate advantage will wane after the Bank of Japan today raised borrowing costs to 0.5 per cent and said rate increases will be gradual.

"It is going to be a mixed bag for the rupee in the next few days,'' said Vikas Babu, a currency trader at state-owned Andhra Bank. "We can see some demand for dollars from importers, and higher Japanese interest rates may make a marginal dent on equity flows into India.''

The rupee was at 44.1862 against the dollar as of the 5 pm close in Mumbai, compared with 44.185 yesterday, according to data compiled by Bloomberg. The currency may trade between 44.10 and 44.20 in coming days, Babu said.

Companies, including Indian Oil Corporation, the country's biggest refiner, typically step up dollar purchases at the end of every month, as they settle their import bills. India depends on oil imports to meet three-quarters of its annual energy needs.

The rupee halted gains, and has traded between 44.025 and 44.232 this month, on speculation the Reserve Bank of India is buying dollars. India's foreign exchange reserves rose more than $5 billion in the week ended February 9, the most since at least 1992.

Japanese interest rates at the lowest among major economies have encouraged investors to make so-called carry trades, in which they borrow in yen and invest in assets offering higher yield, such as Indian stocks.

The Bank of Japan (BOJ) rate increase may deter some of those flows to India, Babu said.

Equity purchases by global funds have helped India's benchmark Bombay Stock Exchange Sensitive Index, or Sensex, rise almost 60 per cent since June 14 to a series of records. Overseas investors bought $8 billion more Indian shares than they sold last year, following a record net $10.7 billion in purchases in 2005, according to the Securities and Exchange Board of India.

The capital flows helped the rupee post six months of gains, the longest winning streak since October 2003, according to Bloomberg data. The currency closed at a 16-month high on February 6.

The rupee was higher from yesterday in the forwards market. Investors who want to buy forward contracts to purchase dollars a year from now using rupees need to pay 2.95 per cent more than the exchange rate in the cash market. They had to pay 3.07 per cent more yesterday.