RBI denies report on exchange rate band
The rupee sank to an 18-month low of 36.15 yesterday but recovered after the Reserve Bank denied a newspaper report that the government was planning to introduce an exchange rate band.
In later deals, the dollar was quoted at 35.895/925 rupees, off the intra-day low but still weaker than Tuesdays close of 35.710/715.
Panic gripped the markets as nervous players anticipated a weakening of the rupee and corporates scrambled to cover their open postions. The result: forward premia for the six-month dollar surged to 7.69 per cent from 6.05 per cent on Tuesday and the one-year dollar rose to 6.95 per cent from 5.88 per cent.
When the Prime Minister of the country makes a statement of this kind, there is bound to be some impact on the market, said P H Ravikumar, senior vice-president at ICICI Bank.
Cash trading was also volatile with cash-spot which is the premium of the spot dollar price over the cash dollar price moving to a premium of 2 and 5 paise on the buy and sell side respectively before closing at 0/1 paise, yesterday. On Monday, the cash-spot closed at 0.5/1.5 paise.
The news report, which elicited a strong denial from the central bank, saw the long-term market sentiment suddenly turn bearish after a strong bull phase in the preceding weeks.
The RBI said no decision had been taken on fixing an exchange rate band. The exchange rate will continue to be determined by market forces, the RBI statement said. Trading volumes were not high, but the market had already been roiled by nervous sentiment that had been influenced by RBI deputy governor YV Reddys admission at a conference of foreign exchange dealers last Friday that the rupee appeared overvalued based on an analysis of the real effective exchange rate. The news report of an exchange rate band exacerbated the gloom in the market.
The rupee depreciated intra-day by 1.2 per cent or 45 paise. It opened at 35.72-74, but quickly sank to 36.10-15.
At 11:52 am, the RBI issued a clarification stating that the report quoting Prime Minister I K Gujral as saying that the government would fix an exchange rate band was misleading. The rupee recovered somewhat, moving between 35.90 and 36 for the rest of the day.
The rupee has traded in a broad 35.70 to 35.85 per dollar band for more than a year although the greenback has appreciated against major world currencies during this period.
Although the RBI statement somewhat calmed the dealers jangling nerves, the market still seems to be a little wary of the situation. Said a treasury head, The amount of corporate activity witnessed over the past few days is much higher than what has been witnessed over the last few months.
Volatility in the forwards caused the spreads between the buy and sell quotes to widen from the usual three paise to 15-20 paise. July opened at 193-196 paise, climbed to 240-260 paise. After a brief recovery at mid-day to 195-198 paise, it dipped again under paying pressure and closed at 220-235 paise. February opened at 90-95 paise, shot up to 120-125 paise, and closed at 130-140 paise.
The market now anticipates a depreciation of the rupee in the next couple of months. The deputy governor sent a strong signal to the market that the exchange rate is overvalued and warrants a correction, said a corporate treasury head.
As of now, activity is restricted to the near term as players try to sit out the volatile phase. The feeling is that there no immediate danger to the rupee as dollar inflows remain strong.
However, the chief dealer at a Bombay bank said the RBI should be happy with Wednesdays fall. At such a level there is no pressure on them to intervene aggressively and buy dollars (to arrest the rupees rise).
The RBI intervenes in the spot market by purchasing dollars to check the rupees rise and pumps rupees into the banking system. This boosts money supply and stokes inflation.
It has bought $4.6 billion in the first four months of the current fiscal beginning April 1.
