Rupee soars as banks offload dollars

MARKET ROUND-UP

The rupee had its biggest weekly gain in more than 15 months after tax payments sapped funds from the banking system.

The currency reached the highest in 19 months this week as cash shortage forced banks to buy rupees for their lending and spending needs. Indian companies may have paid as much as Rs 40,000 crore in advance tax on March 15, according to estimates of traders surveyed by Bloomberg News.

"The liquidity condition has been the single biggest contributor to the rupee's rise,'' said Sudarshan Bhatt, chief currency trader at state-owned Corporation Bank in Mumbai. "I think it will hold most of those gains in the near term.''

The currency rose 1.2 per cent this week to 43.58 against the dollar as of the 5 pm close in Mumbai, according to data compiled by Bloomberg. That's the best weekly gain since the five-day period through December 16, 2005.

As much as Rs 27,500 crore was drained from the system after the central bank, between December and February, raised the amount that lenders had to set aside as cash to cover deposits. Moreover, the tax payments by companies in March prompted banks to sell dollars and borrow rupees from the monetary authority every day since March 16.

The gains in the currency were moderated by speculation that importers will buy dollars. "It's an opportunity for importers as the rupee may not gain as it did earlier this week from the scarcity of funds in the banking system,'' said Vikas Babu, a trader at state-owned Andhra Bank in Mumbai. "That tightness may ease soon. So traders who went short on the dollar will look to buy it now.''

A short position is a bet on an asset's decline. A stronger rupee means that importers would have to convert less of the currency into foreign exchange to make their overseas payments. The rupee may decline to 44 in the next few days, Babu asserted. The central bank said, on March 21, that funds borrowed via repurchase auctions can be used for inter-bank lending. That helped ease the rates of overnight funds to around 9.5 per cent today from 67.5 per cent on March 21, the highest in at least six years, according to data compiled by Bloomberg.