The spot rupee, which is likely to open around 46.19/25 to a dollar, is expected to hover in the range of 46.10-46.30 during the week.
Foreign exchange inflows, which helped the rupee strengthen against all major currencies, are likely to slow down a bit with the interest rate cap being imposed on non-resident external rupee (NRE) deposits.
Although the cap is not directly related to FII inflows, RBI has sent out a strong signal that volatility caused by arbitraging by repatriable funds, that are temporary in nature, will be stringently limited through direct or indirect intervention.
Last week, the rupee opened at a high of 46.05 to a dollar but aggressive intervention by the central bank pulled it down to 46.14, which further went down to 46.38.
This created panic and banks were caught with short positions which pushed up the demand for dollars. Reversing the trend, the RBI sold dollars. This brought down the rupee to 46.20 to a dollar.
While the selling happened last Wednesday, the rupee closed at 46.14 to a dollar after opening at 46.04/05 following dollar buying by the RBI.
The RBI had last intervened in the market to sell dollars during the end of May, when the rupee gained 35 paise in a day from 46.90 to 47.25.
The intervention last week saw the rupee gain straight 20 paise to 46.23, which signalled that the RBI is not comfortable with the rupee breaching the 46 mark.
In addition to the rupee losing to the dollar, most inter-bank players were caught with short positions.
Backed by encouraging economic data from the US, the dollar strengthened with yields of the 10-year US treasury bonds moving up from 3.65 per cent to 4 per cent.
Though the news is not quite favourable for importers, exporters have a reason to rejoice. While the rupee is expected to stabilise around 46.15/20, another factor creating dollar demand will be liberalisation of foreign exchange transactions under the current account.
Forwards to stay grooved
Forward premiums are expected to rule at present levels. Till now movements in the forward market have been primarily owing to central bank intervention and interbank activity to covert FII inflows into rupees.
Therefore, with inflows declining marginally and the spot rupee weakening to dollar, premiums have softened. This is because had it been trade flow related, forward rupee would have gone up with the weakening of the currency.
However, now with the rupee stabilising around 46.17/23 levels, if importers start covering forward positions, premiums are expected to go up.
Another factor that might affect the rupee is the fact that the dollar has started strengthening against other major currencies such as the euro and pound sterling.
Although it does not look reasonable given the domestic interest rates, it should be noted that the dollar is also backed by encouraging economic data released from the US.
