Rupee hits 25-month peak; RBI buys Dollars.

The rupee struggled to hold near 25-month highs on Thursday despite dollar buying by the Reserve Bank of India (RBI) and large demand from oil importers, but broad dollar losses helped the local unit surge 0.9% on the day.

The Reserve Bank bought dollars for around Rs44.10 on Thursday, dealers said, in a move that helped brake a rise in the rupee and is believed by traders to have been its first such intervention this year.

The RBI has been reluctant to intervene in the currency markets but may be forced to do so as foreign investors are expected to pour in billions of dollars to buy shares of the country's largest IPO (initial public offer), which opens next week.

The partially convertible rupee closed at 44.1112 per dollar, off a high of 44.09, its highest since September 1, 2008, and above its previous close of 44.5152.

"It is a good level for them to intervene. It achieves two purposes, infuses rupee liquidity in the market and also prevents rupee appreciation," a senior dealer with a state-run bank said, noting that there was also heavy demand for dollars from oil importers.

Oil is India's biggest import and refiners are the largest buyers of dollars in the domestic currency market. Global crude prices rose towards five-month highs above $84 per barrel.

"Coal India inflows have started coming in, which is why the rupee rose to 44.09 per dollar. Later there were also some forward cancellations by exporters which pulled it off highs," said A Ajith Kumar, a senior dealer with Federal Bank in Mumbai.

"The rupee may trade in a range of 44.00 to 44.30 per dollar tomorrow," Kumar said.

Record foreign buying of domestic stocks has been the main driver for the rupee in recent weeks, and the inflow is expected to rise when the Coal India Limited IPO opens next week.

Coal India's $3.5 billion IPO opens on Monday and could push the rupee up to 43.50 per dollar and force further intervention, dealers said. Other state firms planning big share sales include Power Grid Corporation of India and Steel Authority of India.

"India would intervene in the foreign exchange markets in order to maintain stability," RBI governor Duvvuri Subbarao said at the International Monetary Fund in Washington on Saturday, but he also said at the time that the bank had not been intervening.

Other central banks in Asia, including the Bank of Thailand and Bank of Korea, have been intervening in their forex markets to prevent a sharp appreciation of their currencies due to an influx of hot money flows in recent weeks.

Policymakers in emerging economies last week voiced concerns over hot money that is pushing up currencies.

From December through August, for which the latest data is available, India's central bank did not intervene in the foreign exchange market.

Traders said they expect the central bank to protect the 44.10 level in the near term as a breach of that level could push the rupee higher towards 43.70 and then 43.50.

Since the start of September, the rupee has appreciated 6.7% on foreign equity inflows of more than $9.5 billion. For the year to date, the rupee is up 5.5% on record foreign investment in shares of $22.5 billion.

The dollar's broad losses versus majors cheered sentiment for the rupee. The index of the dollar against six majors was down 0.7% when the rupee closed.

One-month offshore non-deliverable forward contracts were quoted at 44.40, 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 all closed at 44.28, with the total traded volume on the three exchanges at a low $8.2 billion.

Source : dnaindia.com