Rupee rebounds from weak open against US dollar.

The rupee recovered from a weak open to gain to above 56 to the dollar on Friday, though broader sentiment was weak as the euro fell to a 2-year low, reflecting the worsening euro zone debt crisis and disappointing Chinese manufacturing data.

At 9:10 a.m. the Indian currency traded at 55.99/01 per dollar, stronger than its 56.08/09 close on Thursday. It had hit a record intraday low of 56.52 against the dollar Thursday.

The Indian currency is now the worst performing Asian currency this year, falling 6.35 per cent in the month of May, the biggest monthly fall in six months.

The rupee opened lower on Thursday at 56.50 and fell further to hit a record low of 56.52, continuing its downward momentum against the US dollar. It ended stronger at 56.09/$ from Wednesday’s record closing low of 56.23/24 per dollar on the back of some genuine dollar sales, stronger Euro and higher global stock markets.

India’s gross domestic product (GDP), which grew at a much lower rate of 5.3 per cent in the January-March quarter, was expected to drag the rupee further. However, it did not affect the rupee on Thursday, which continued to trade near the lows hit before the data announcement.

The Indian currency has seen choppy trade this month, as oil importers ramped up demand for the greenback ahead of the end of the month, while global risk assets were hit by worries about Spain’s soaring borrowing costs and expectations that more spending may be needed to support its ailing banks. Risk aversion deepened over continued euro zone worries, setting up expectations about potential intervention from the Reserve Bank of India. The Euro too hit a two-year low on Wednesday.

The perception of slowing policy reforms has further compounded the losses. A nationwide strike is planned for Thursday to protest the government's recent decision to allow petrol prices to be hiked, an action that at first had been welcomed by markets as a gesture of fiscal consolidation.

The rupee's fall to all-time lows has set up expectations about potential intervention from the Reserve Bank of India, though most traders said they had not spotted any significant dollar-selling via state-run banks on Thursday.

"Unless the RBI keeps coming in with measures, the rupee will continue to remain under pressure. There are still a huge amount of open importer positions remaining," said Subramanian Sharma, director at Greenback Forex.

The Reserve Bank of India was believed to have intervened in spot and forward markets when the rupee hit seven consecutive record lows over the previous two weeks. On Wednesday, traders cited strong dollar demand from oil importers looking to meet their commitments at the end of the month.

Meanwhile, Moody's said that significant depreciation of the Indian rupee is insignificant for India's sovereign credit. "Government foreign currency debt comprises only 7 per cent of total government debt and 5 per cent of GDP. Most of it is owed to multilateral and bilateral creditors and has a maturity profile that keeps annual foreign currency repayments relatively low. Therefore, the direct effect of depreciation on the government’s own debt repayment capacity is limited," Moody's said in a report.

The rupee has been depreciating to new lifetime lows on increased dollar demand from importers, especially oil refiners coupled with capital outflows from foreign funds. Even selling of the American currency by exporters and banks failed to check persistent fall.

Dollar has been appreciating against a basket of currencies worldover. Dollar Index has hit a 20 month high in trade, while Euro has been depreciating, down over 5 per cent this month against the US dollar and Yen.

According to Standard Chartered, Rupee may drag to 58.60 levels against the dollar on account of technical weakness. Morgan Stanley, however, expects rupee to cross levels of 60 and touch 62.70/$.

India's slower than expected growth rate will further complicate matters for the RBI, which is faced with growing calls for more rate cuts despite its continued concerns about inflationary pressures. It had delivered a 0.5 per cent cut in the repo rate last month, but analysts had expected the central bank from refraining to further lower India's main lending rate until later in the year.

Source : profit.ndtv.com