Rupee touches a 25-month high of 43.98 intraday
Coal India’s upcoming initial public offering cast a long shadow over India’s financial markets today. The country's largest IPO at Rs 15,400 crore, opening on Monday, prompted investors and brokers to stock up on cash by shedding other shares, pushing the Sensex down by 1.8 per cent on Friday, its third decline this week.
Foreign Institutional Investors (FIIs) were also net sellers today at Rs 113 crore — their first one-day net sale since September 7. Domestic institutions sold shares worth Rs 1,053 crore, according to provisional figures available with the Bombay Stock Exchange.
Investor sentiment also took a few punches as inflation rose to 8.62 per cent, increasing pressure on the Reserve Bank of India (RBI) to increase interest rates. Information technology bellwether Infosys Technologies said the rupee's appreciation was hurting its earnings.
To be sure, the benchmark index is still trading at the highest level in 34 months, as FIIs have pumped in a record $22.7 billion since January. This is the biggest annual figure since India opened up to investment by overseas funds in 1992.
Even as FIIs pump in funds, the central bank has been careful not to sterilise them, as it would add rupees to the system, making its task of controlling inflation more difficult. The banking system remains short of funds and banks this week borrowed between Rs 69,000 crores and Rs 88,570 crores from RBI via its daily liquidity adjustment facility (LAF).
The Coal India issue could accentuate the scarcity of funds in the system, if the share sale is oversubscribed a few times and the central bank doesn’t act to buy the dollars from subscribing overseas funds, bankers said.
Responding to a question on the IPO squeezing liquidity further, RBI Governor D Subbarao promised that if necessary, the central bank would open a second LAF window. RBI is keeping the banking system in deficit as it tackles the unrelenting rise in inflation, after raising key rates five times this year.
The central bank has been walking a fine line as it juggles the tasks of containing inflation, keeping liquidity in balance and ensuring the local currency doesn’t appreciate so much that its hurts exports and domestic industry by making imports cheaper.
The rupee has gained 6.5 per cent since the beginning of September. The outlook of a weakening dollar globally has the potential to strengthen currencies of several emerging market economies. The rupee closed 0.8 per cent stronger at 44.10 to a dollar, after rising to a 25-month high of 43.98.
The rise of the rupee was partially fuelled by a weakening dollar across global currency markets, following a speech by US Federal Reserve Chairman Ben Bernanke outlining a case for quantitative easing measures.
Yesterday, RBI stepped into the forex market, possibly for the first time this year, after the rupee touched 44.10 against the dollar, according to forex traders.
Subbarao today also reiterated comments made in Washington last weekend that RBI may intervene "if inflows are lumpy and volatile".
The yield on benchmark 7.8 per cent government securities maturing in 2020 rose 4 basis points to close the day at 8.06 per cent, following higher-than-expected wholesale price inflation for August.
The inflation figures strengthen the possibility of a rise in policy rates in RBI's second-quarter monetary policy review due on November 2, according to money market participants.
