Rupee rises to 8-year high on cash crunch

MARKET ROUD-UP

The rupee rose to the highest since June 1999 as banks bought the currency to replenish funds after companies paid taxes ahead of fiscal close on March 31.

The currency gained the most among the 15 Asia-Pacific currencies tracked by Bloomberg in the past five days as banks sold dollars to raise cash, avoiding costlier money market borrowings. The rate that banks charge each other for overnight loans has more than doubled since March 15, the day companies paid quarterly tax. The rupee has gained the most since March 2004 on speculation that overseas fund managers will buy more equities.

"The strength in the currency is directly related to the cash shortage,'' said Mohan Shenoi, treasurer at Kotak Mahindra Bank in Mumbai. "Everyone is selling dollars to generate rupee liquidity. We are also seeing capital flows boosting dollar supply.''

The rupee rose 0.6 per cent to 43.035 to the dollar as of the 5 p.m. close in Mumbai, taking this month's gain to 2.8 per cent, according to data compiled by Bloomberg. This is the highest close since June 8, 1999. The rupee may advance as high as 43 by the end of this week, Shenoi said.

Cash shortage in the banking system has pushed the borrowing costs in the money market higher since companies paid their taxes. Overnight loan rates have averaged 18 per cent in the last two weeks, compared with 5.5 per cent in the previous two weeks, according to Bloomberg data.

Companies may have paid as much as Rs 40,000 crore ($9.3 billion) in tax on March 15, according to estimates of traders surveyed by Bloomberg News.

The inflows of investment from abroad are also helping the rupee gain. Direct investment from abroad may double to $12 billion in the year, exceeding equity purchases by overseas investors for the first time, Trade Minister Kamal Nath said in February.

Global funds have bought $1.4 billion upto March 26, according to Sebi data. They had purchased $8 billion in 2006, following a record $10.7 billion in 2005.

Asia's fourth-largest economy will grow 9.2 per cent in the year through March, accelerating for a third straight year, the government said on Feb. 7. It grew 9 per cent during the previous year and 7.5 per cent in the year before.

The rupee's gains were moderated by concerns that importers such as oil refiners will take advantage of the rally in the rupee to buy dollars cheaper. A stronger rupee reduces the cost of buying goods abroad. An increase in oil prices may boost the demand for dollar from refiners.

``We have seen some importers make dollar purchases for month-end needs,'' said Pankaj Sharma, chief currency trader at state-owned Union Bank of India in Mumbai. ``It's an opportunity for importers who have short-term payment liabilities. The rupee may not rise as much as it has in the past week.''

India meets three-fourths of its energy requirements through imports. Crude oil in New York rose for a seventh day today, reaching the highest in more than six months. It gained 3.1 per cent to $64.9 a barrel today.