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 Perils of an ad hoc forex policy
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Rupee falls, strong dollar overseas on weak shares
October, 18th 2010

The rupee weakened on Monday, pulling back from over 25-month high scaled in the previous session, weighed by dollar demand from oil importers, strong dollar overseas and losses in local shares.

Capital inflows were also not too strong so far in the day, which added to the rupee's downside, dealers said.

"Capital inflows are mostly stable now. We expect $8 billion to $10 billion fresh inflows in the next three days towards Coal India IPO (initial public offering)," said a dealer at a foreign bank.

At 10:40 am, the partially convertible rupee was at 44.22/23 per dollar, weaker than 44.10/11 at close on Friday when it had risen to 43.95, its highest since August 29, 2008.

Dealers expect the Indian unit to move in 44.10-44.35 band.

Indian shares fell as much as 1 per cent early on Monday, taking cues from weak Asian markets and as the world's largest coal miner Coal India's $3.5 billion IPO, the country's largest, opened.

Traders said they do not expect the central bank to intervene in the foreign exchange market in the day, as a sharp rise in the rupee was unlikely in the absence of large inflows.

"There are big corporates buying dollars in the market which will take care of any sharp appreciation in the rupee today," said a dealer at another foreign bank.

Besides, dollar demand from oil importers to meet their payment needs and expectations the rupee may give up some gains following the sharp rally could also pin down the rupee.

Oil is India's biggest import and refiners are the largest buyers of dollars in the domestic currency market.

For the year to date, the rupee is up 5.3 per cent on record $23.2 billion foreign fund inflows into shares.

On Friday, Reserve Bank of India Governor Duvvuri Subbarao said the central bank will intervene in the forex market if inflows turn lumpy.

Traders said they will continue to closely watch the central bank this week, which bought dollars on Thursday in a move they believe was the first intervention this year.

The dollar rose against a basket of currencies on Monday and pulled away from a 10-month low, with market players saying the short-covering bounce may have more room to run given the recent build-up of bets against the dollar.

One-month offshore non-deliverable forward contracts were quoted at 44.50, weaker than the onshore spot rate.

In the currency futures market , the most traded near-month dollar-rupee contracts on the National Stock Exchange, MCX-SX and United Stock Exchange were all at 44.3350, with the total traded volume on the three exchanges at a moderate $2.7 billion.

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