Rupee Weakens on Importer Dollar Demand.

MUMBAI: The Indian rupee weakened after a steady start on Tuesday as strong dollar demand from importers, weak Asian currencies and choppy local shares outweighed support from foreign fund inflows, mainly towards Coal India share sale. State-run Coal India launched a $3.5 billion initial public offering (IPO) on Monday, the country's largest IPO so far, with its lower-than-expected pricing and exposure to India's booming electricity demand expected to draw solid investor interest. The issue is expected to draw billions of dollars in overseas demand that could add to upward pressure on the rupee.

But, dealers expect the rupee to be boxed in 44.35-44.65 per dollar band on persistent importer dollar demand. "With oil consisting of nearly 80 percent of our total imports, the demand from them (importers) is quite large. They have been consistently buying (dollars)," said a dealer at a foreign bank. At 11:09 a.m. (0539 GMT), the partially convertible rupee was at 44.48/49 per dollar from 44.36/37 per dollar at close on Monday.

It had risen to 43.95 per dollar on Friday, its highest since Aug. 29, 2008. Gold importers were also buying dollars to take advantage of the near 1 percent drop in international gold prices. Spot gold was down about $4 on the day at $1,364.65 an ounce, after falling 0.9 percent on Friday. Weak Asian currencies and anticipation of capital outflows as refund after the Coal India IPO allocation weighed on the rupee, while Brazil's tightening of foreign fund investment norms to curb its currency rally also hit sentiment.

For the second time this month, Brazil raised the so-called IOF financial transactions tax on local bond purchases by foreigners, this time to 6 percent from 4 percent. On Oct. 4, it had doubled the tax from 2 percent. "Market is now positioning for eventual outflows that might happen from the month end. Also, there are not too much of inflows towards Coal India yet unlike what was expected," said a dealer at another foreign bank. For the year to date, the rupee is up 4.6 percent on record $23.2 billion foreign fund inflows into shares. Of the total capital inflows so far, around $10.6 billion has come in since September, which had seen the rupee gain 5.8 percent.

One-third of Coal India's IPO, which will close on Thursday, was subscribed so far. Indian shares were choppy in morning trade and were trading up 0.1 percent, after rising as much as 0.8 percent in early trade. Most Asian currencies were marginally weaker than the U.S. dollar on Tuesday.

Dollar was also firm against majors from previous session, but off highs, preventing a sharp upside to the rupee. The index of the dollar against six majors was up 0.6 percent at 77.408. Technical analysts say it needs to extend above its Oct. 12 high of 77.93 to signal a short-term bottom is in place after Friday's 10-month trough of 76.144.

One-month offshore non-deliverable forward contracts were quoted at 44.76, 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 at 44.5875, 44.5850 and 44.5850 respectively, with the total traded volume on the three exchanges at a low $2.3 billion.

Source : economictimes.indiatimes.com