Rupee weakens on high dollar demand by importers

Thin supply of the dollar put pressure on the rupee, while market sentiments were dampened as India's factory activity shrank in August

After two consecutive days of strengthening last week, the rupee once again weakened against the dollar on Monday due to high demand for the greenback from importers.

Thin supply of the dollar, owing to the Labour Day holiday in the US, also put pressure on the rupee, while market sentiments were dampened as India’s factory activity in August shrank for the first time in four years.

HSBC’s India manufacturing PMI dipped to 48.5 in August compared with 50.1 in July, indicating a contraction for the sector. A fall below the 50-level indicates contraction and the August reading is the lowest since March 2009.

The rupee ended at Rs 66.02 on Monday, compared with Friday’s close of Rs 65.71 per dollar. It had opened at Rs 66.11 and touched a low of Rs 66.30 and a high of Rs 65.68 intra-day.

“The step taken by the Reserve Bank of India (RBI) last week to allow a foreign exchange swap facility to three public-sector oil companies is a good move, but there is no quick fix to the weakness in the rupee. The weakening bias continues in the medium-term, but some stability in the rupee movement is expected in the near term,” said Partha Bhattacharya, deputy chief executive, Mecklai Financial.

In the current financial year, the rupee has weakened by 21.63 per cent against the dollar. The street expects more steps from the government and the central bank, which can help the rupee as the US central bank, Federal Reserve, has already hinted that it would soon pull back its bond-buying programme.

India’s gross domestic product growth for the first quarter of the current financial year stood at 4.4 per cent, compared with 4.8 per cent in the year-ago period. The slowing growth is also dampening sentiments in the foreign exchange market. Last week, the rupee had touched an all-time low of Rs 68.85 per dollar.

  Meanwhile, government bond yields fell on Monday as traders took fresh positions. “The net issuances of government bonds is lesser in September and besides that, there is redemption to the tune of Rs 45,000 crore in the next few days.

These factors are helping yields to fall,” said N S Venkatesh, chief general manager and head of treasury, IDBI Bank and chairman, Fixed Income Money Market and Derivatives Association of India.