Rupee ends steady; gradual depreciation seen

Reuters: The rupee gave up early gains but ended steady on Monday as late importer dollar demand offset selling of the greenback by exporters.

The local currency is expected to be under pressure due to the Central Bank’s dollar buying plan, dealers said.

The spot rupee closed at 153.70/73 per dollar, hardly changed from Friday’s close of 153.70/75.

“The market expects the rupee to depreciate further as the central bank is allowing a gradual depreciation,” a currency dealer said, asking not to be named.

“We expect a 4% depreciation for this year.”

The rupee has fallen around 2.6% so far this year.

Central Bank Governor Indrajith Coomaraswamy said the rupee was still “over-valued” and that the Central Bank was still buying dollars to avoid any appreciation.“What people don’t understand is an over-valued rupee is subsidy to foreign producer at the expense of local producers. You are actually subsidising foreign exporters and producers of import substitutes,” he told Reuters on Monday. He also said the Central Bank had bought dollars in the range of $750 million to $800 million from the market, out of the $1.2 billion it had planned to purchase in the 10 months from March this year.

The Central Bank is compelled to buy dollars from the market to meet the reserve target set by the International Monetary Fund under a $1.5 billion, three-year loan program.

The market has priced in further depreciation due to the Central Bank’s no-intervention policy to defend the currency, dealers said.

The rupee has been under pressure since early this year after the Central Bank stopped providing support for the currency at a time when the island nation faces a balance of payments crunch.

The spot rupee resumed trading on 19 June for the first time since 5 May, when the Central Bank fixed its reference rate at 152.50.

Seasonal demand for dollars is expected to pick up from August, dealers said.