Rupee Retreats from 3-Month Peak on Import Demand.

MUMBAI: The rupee pulled off from three month highs on Monday by dollar demand from oil companies and importers but gains in local shares and broad losses in the dollar boosted sentiment. The partially convertible rupee closed at 45.70/71 per dollar, after touching 45.5850, its strongest since June 21 and 0.3 per cent above 45.835/845 at close on Friday.

"There was importer covering plus some profit taking on previous sales in late trade," said Ananth Narayan G., head of fixed income, currencies and commodities, South Asia at Standard Chartered Bank in Mumbai. "But the rupee's move has been sharp, and there is a feeling that in the short run, the market has extended itself a bit. Broadly exporters still haven't hedged enough. Eventually, we will see exporters come in at say 46.00 levels".

The rupee strengthened 1.4 per cent last week in its biggest weekly gain in three months after the central bank raised key rates more than expected at its mid-quarter policy review. The Reserve Bank of India last Thursday hiked key rates to fight inflation and signalled that a tightening cycle that has seen five rate hikes this year may be nearing an end.

Still, India has one or two interest rate increases in store for the rest of the fiscal year that ends in March, a Reuters poll conducted after the policy showed.

"Rupee was broadly taking cues from equities and other foreign institutional investor flows today " the assistant general manager and foreign exchange trader at a state-run bank in Bangalore said. "There was some buying by importers, but 45.50 is a possible target over the next two days, if the market remains positive."

The dollar slipped broadly on Monday on speculation the Federal Reserve may flag the need to inject more stimulus into the struggling US economy when it announces its latest policy decision on Tuesday.

The index of the dollar against six majors was down 0.3 per cent, while most Asian currencies too were stronger. Rising foreign fund inflows propelled Indian shares to scale a fresh 32-month peak for the sixth straight session to close 1.6 per cent higher, but there were concerns if the market was rising too soon too fast.

Foreigners have bought shares worth a net $15.8 billion so far in 2010, in addition to last year's record $17.5 billion. The rupee is up 1.8 per cent so far this year. One-month offshore non-deliverable forward contracts were at 45.87, weaker than the onshore spot rate.

In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX closed at 45.76 and 45.7575 respectively, with the total traded volume on the two exchanges at a high $9 billion.

Source : economictimes.indiatimes.com