Rupee recovers as large public sector banks sell US dollars

Likely regulatory intervention helped the Indian rupee gain 15 paise to close at 95.81 against the US dollar on Friday, bouncing back from the intra-day low of 95.94 and the previous close of 95.96, while the benchmark bond yield rose to 7.14%, the highest level seen in the past four months.

Market participants said large public sector banks were seen selling dollars at the behest of the Reserve Bank of India (RBI) in a market with thin volume, helping the local currency recover from the near the 96 level despite global crude price hovering near $105 a barrel and raising the risk of imported inflation.

The RBI was active in the market even before the opening of the day's trade, boosting the rupee to a stronger opening of 95.90 per dollar, traders said.


During the day, the RBI used dollar-rupee sell-buy swaps to absorb rupee liquidity from the inter-bank system, two people said.

Exporters also sold dollars while the one-year forward premium increased to 3.5%, a level not seen since the last week of May.

"RBI deputy governor Poonam Gupta's remark that the rupee was overcorrected, making a case for appreciation, should stabilise the rupee," the treasury head of a private bank said on condition of anonymity. "At least the pace of depreciation should moderate."

The rupee had been weakening for the past couple of days due to these concerns and high dollar demand from importers, who were mopping up the US currency ahead of a likely bank strike to secure month-end payments.

"The rupee remains under pressure from external financing requirements, changing capital flows and a higher global cost of capital," said Siddharth Chaudhary, head- fixed income at Bajaj Asset Management.

"In this environment, a significant decline in domestic interest rates could work against currency stability. This may reduce the room for monetary accommodation and require real yields to remain higher than domestic inflation conditions alone would otherwise suggest," he said.

The benchmark 10-year bond yield hit 7.14% earlier in the day before the auction, its highest intraday level since May 20, before easing a tad. The yield closed at 7.11% on Thursday.

This is in line with the global yield tightening. The US 10-year treasury yield rose above 5.20%, its highest since 2007. Japan's 10-year yield rose to 3.115%, a level last seen in August 1996, while

Germany's 10-year yield, a benchmark for the euro zone, hit a 17-year high of 3.5798%, Reuters reported.