Indian Rupee Picks Momentum In Rise Against US Dollar

The Indian Rupee rose past 54 per US Dollar today for the first time since Nov. 2 after Oil Secretary G.C. Chaturvedi said yesterday oil companies have been permitted to change prices of the fuel over a period of time. The rupee rose 1.6% this week to 53.915 per US Dollar as of 10:25 a.m. The INR strengthened to its highest level in near two-and-half months, breaching the key 54/US Dollar mark, on continued bullishness a day after the government partially deregulated diesel prices and allowed state refiners to adjust diesel prices, a move that may help rein in energy subsidies and narrow the budget deficit.

Key indices hit fresh two-year highs early Friday, led by powerful rallies in state-owned oil companies. At 9:41 a.m., the partially convertible Rupee was at 53.98/99 per dollar, after hitting 53.95, its strongest since November 2 and sharply up from its previous close of 54.3850/3950. Traders said the hike in diesel prices would gradually bring down the large fiscal deficit and was a key positive for the rupee. Broad gains in other Asian currencies and a risk-on mood in global markets also aided the rupee. The rupee today rose against the dollar in early trade due to selling of the US currency by exporters and banks despite firm global cues.

Besides, a higher opening in the domestic equity market also supported the rupee but euro and yen’s weakness against the dollar, capped the rupee’s gain. The government decision, in its continuing economic reform agenda, which has allowed oil marketing companies to raise diesel prices, has raised investor sentiment, which led to a rally in the stock market. Indian Oil Corp. (IOCL), the nation’s biggest refiner, surged as much as 19%, the most since May 2009, the most in three and a half years in Mumbai trading and led an advance in refinery stocks after diesel prices were raised for the first time in four months. IOC jumped 15% in the morning trade after a 7% rally yesterday. The government has, however, not decided on the quantum of the hike per month, although reports suggest it will be 50 paise per month.

This move is expected to make the Reserve Bank of India (RBI) more amenable to a cut in interest rates at its next policy review meeting on January 29. The BSE Sensex was up 153 points at 21,117, and the Nifty was up 40 points at 6080. Among the big gainers, ONGC and IOC were up 10-11%, and HPCL, BPCL and Oil India were up 6-7%. Indian Oil raised diesel prices by 0.50 rupees a liter in New Delhi effective today, according to the company’s website. The refiner also said it increased the price of domestic non- subsidized cooking gas by 46.50 rupees a bottle.

Rupee rise gives way to lower call money rates and bond yields:
RBI intervention was seen at different levels and market participants said RBI is likely to have sold around $250 million. The Rupee’s rise was also supported by the rise in local shares after oil minister Veerappa Moily announced partial deregulation of diesel pricing. Government securities (G-sec) rose on fresh demand from banks and companies. The 8.33% G-sec maturing in 2026 rose to Rs 103.37 from Rs 103.06 yesterday, while its yield declined to 7.92% from 7.96%. Call money rates ended lower at the overnight market here on Thursday due to lack of demand from borrowing banks amidst ample liquidity in banking system. The rate finished lower at 8.15% from the previous closing of 8.20%. It moved in a range of 8.20% and 7.95%.

Government steps in right direction to help rupee and funds inflow:
Prime Minister Manmohan Singh has stepped up efforts to improve government finances since mid-September, when he raised diesel prices for the first time in 14 months, to avert a sovereign ratings downgrade. The Indian Government’s fuel-policy move is good for fiscal management and will help boost confidence among overseas investors. Overseas funds have bought a net $2.2 billion of domestic shares this month through Jan. 16, exchange data show. Offshore forwards indicate the rupee will trade at 54.71 to the dollar in three months, compared with expectations of 55.69 at the end of last week. Finance Minister P. Chidambaram aims to cut the budget deficit to 5.3% of GDP this financial year from 5.8% in the previous period. India forecasts Asia’s third-largest economy will expand at 5.7% this financial year, the weakest pace in a decade.