Rupee recovers losses on overseas fund flows, exporter dollar sales; gilts weaken

NEW DELHI: The rupee recovered all losses versus the US dollar on Wednesday and settled on a marginally stronger note as some foreign banks sold the greenback on behalf of overseas companies looking to invest in Indian firms, dealers said.

Sales of the American currency by some banks on account of exporters also buoyed the partially convertible rupee on Wednesday, dealers said.

The rupee settled at 74.3950 per US dollar on Wednesday as against 74.4225/$1 on Tuesday. The Indian currency which had opened at 74.5250/$1 moved in a band of 74.30-74.5425/$1 in the course of the day.

The initial weakness in the rupee was on account of a rise in US crude oil prices and as speculation of higher interest rates in the world’s largest economy fuelled fears of outflows of overseas investment from Indian financial markets, dealers said.

The greenback has been hovering near 16-month highs this week, with the dollar index –which measures the US currency versus six major rival currencies -jumping past the crucial 96.50 level. The index, which had closed at 96.06 on Friday, was last at 96.71.

Currency traders also expressed caution ahead of the release of the minutes of the US Federal Reserve’s October policy meeting, due late Wednesday.

With some Fed officials recently calling for a faster pace of bond tapering amid surging inflation in the US, the minutes will be parsed for signs of the country’s central bank adopting a quicker-than-expected approach to monetary policy tightening.

Dealers said, however, that even as the signals emanating from the US suggest higher interest rates, the rupee was to a large extent protected by the sheer size of the Reserve Bank of India’s foreign exchange reserves.

The latest RBI data showed that the central bank’s foreign exchange reserves were at $640.11 billion as of November 12.

“The larger picture here is that while the rupee may depreciate along with emerging market currencies, it will be very hard to speculate against the rupee when the RBI is holding such huge FX reserves,” a dealer with a foreign bank said on condition of anonymity.

“Moreover, one factor which seems to be a secular theme for the rupee is overseas inflows for IPOs (Initial Public Offerings) in India. Today, the rupee pulled back because of these flows and as exporters were unwilling to bet on the rupee depreciating beyond 74.50/$1,” he said.

Government bonds ended the day on a slightly weaker note, with the yield on the 10-year benchmark 6.10 per cent 2031 paper settling one basis point higher at 6.37 per cent. Bond prices and yields move inversely. The benchmark paper moved in a band of 6.36-6.38 per cent.

Bonds took a mild beating Wednesday as elevated US Treasury yields stoked fear of foreign portfolio investors reducing their holdings of Indian sovereign debt, dealers said.

The 10-year US Treasury note has gained around 11 points over the last couple of days and was last at 1.65 per cent. Higher US bond yields diminish the appeal of emerging market fixed income instruments such as Indian bonds.

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