Thursday 26 October 2000

BSENSE Oil price fears pummel rupee to record low MUMBAI: The rupee hit new lows in thin trade on Wednesday on a slowdown in foreign fund inflows and because companies stepped up dollar purchases on fears that oil prices will remain high.

The rupee lost more than 0.4 per cent during the day and ended at a new closing low of 46.64/67 per dollar, just off a lifetime intra-day low of 46.65.

The rupee's earlier intra-day low was 46.45, hit on October 13. At its new intra-day low the rupee has fallen nearly 6.75 per cent against the dollar since January.

Dealers said demand for dollars surged after the rupee breached the psychological 46.50 per dollar level.

``It was like a dam breaking,'' said V Ravi Kumar, chief dealer at ABN Amro Bank.

``Most traders had expected the rupee would hold to its current levels. But once it crossed the 46.50 level perceptions changed,'' he said.

Kumar said the next level eyed by the market was 46.75.

Currency traders expect the rupee to weaken further before stabilising on inflows from an ongoing overseas deposit issue by the State Bank of India (SBI).

Ravi Pai, head of forex trading and derivatives at HDFC Bank said it was unlikely the rupee will be able to reverse these losses.

``Once the rupee propels into a losing mode, it takes a lot to reverse,'' he said.

The rupee has been under pressure this year as foreign capital inflows slowed and oil prices remained firm.

Dollar inflows have slowed to a trickle in recent months as foreign funds investing in Indian markets limited fresh purchases on concern over volatile global equity markets.

Foreign funds have so far invested a net $225.7 million in the current financial year, compared with $2.34 billion in 1999-2000 (April-March).

The pressure on the rupee has been compounded by a surge in global oil prices as Indian imports a significant portion of its crude requirements.

India's oil import bill is expected to leap to $17.5 billion for 2000-01 (April-March) from $12.3 billion a year earlier if oil prices remain around current levels.

Sentiment on the rupee was also hit by regional currencies which were holding ground within recent weak trading ranges amid lingering worries over US tech stocks, an expected slowdown in global growth and high oil prices.

Currency traders said the latest falls in the rupee had been without the volatility that marked the slide earlier this year and this could encourage the central bank to refrain from intervention.

``With the rupee gaining against the euro, it wouldn't make sense for the central bank to dip into reserves,'' a dealer with a foreign bank said.

The fall in the euro and a rise in domestic inflation had also pushed up the rupee's value in trade-weighted terms against its major trading partners.

Traders interpreted the central bank's repo rate cuts this week as a signal it is not worried about the current spell of rupee weakness.

The Reserve Bank of India has cut repo rates, the benchmarks for short term interest rates, by 50 basis points this week. Rate hikes were one of the weapons deployed by the central bank in August to support the rupee when it came under sharp pressure.

While foreign exchange reserves have fallen sharply in the current financial year, they are still sufficient to cover around eight months' imports.

India's foreign exchange reserves are down 8.6 per cent, or $3.3 billion, from a mid-April peak of $38.341 billion, reflecting the central bank's effort to staunch a gaping demand-supply mismatch for dollars.

Reserves are expected to be boosted in the coming weeks from SBI's India Millennium Deposit scheme, which opened to expatriate Indians from October 21. SBI's chairman said last week that the bank had received commitments for $5 billion. (Reuters)

http://www.timesofindia.com/261000/26busi4.htm

-- Martin Thompson (mthom1927@aol.com), October 26, 2000