Rupee rises to eight-year high

Call money rate touches an intra-day peak of 30%.

The rupee today rose to an eight-year high against the dollar with some banks selling foreign currency to tide over an acute domestic currency shortage following year-end corporate tax payments. The shortage also pushed up the overnight call money rate to a high of 30 per cent in intra-day trade.

The rupee closed at Rs 43.03 to the dollar today, the highest since June 1999. It closed at Rs 43.30 on Monday, taking this month's gain to 2.8 per cent.

"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 that are boosting dollar supply."

The Reserve Bank of India (RBI) has not been intervening in the foreign exchange market to moderate the rupee's rise as the resultant easing of liquidity would have gone against the monetary policy stance, dealers said.

Meanwhile, call rates shot up for the second time in a month as the financial year-end liquidity crunch was added to liquidity usage, with several banks having used short-term funds to meet high credit demand. Banks borrow funds for a day in the inter-bank call money market to meet statutory reserve requirements.

The call rate, however, closed at 8.50 per cent, as demand for rupee funds ebbed towards the close of the market. The turnover in the call money market was nearly Rs 17,000 crore, with about Rs 5,500 crore traded at rates ranging from 28 to 30 per cent. The weighted average call rate was 25.77 per cent.

Dealers said the extreme tightness is a sign of several banks having aggressively grown their loan books against the advice of the Reserve Bank of India (RBI).

They said banks would face a rise in the cost of funds for the next couple of months but would find it difficult to pass on any of it to borrowers. Banks have already seen their cost of funds rising by a higher margin against the increase in yields on loans.