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Re gains 10 paise despite RBI intervention
June, 10th 2008

The rupee crept towards the 43-mark on Monday, but the central bank intervention prevented a steep fall. Driven mainly by losses on the stock market and foreign investors repatriating funds, the rupee slumped to an intra-day low of 42.95 against the dollar.

Nationalised banks began selling dollars at this point, thereby strengthening the rupee by 10 paise.

The rupee eventually ended the day at 42.87/88 against the dollar, weakening from the Fridays close of 42.66/67. Meanwhile, bond yields jumped to 8.31% during the day, as fears of a possible rate hike dented the market sentiment.
The central bank has been intervening in the forex market, in an attempt to protect the 43-mark for the past month.

However, market participants suspect that this may not be a viable option for the central bank to intervene on a regular basis. The pressure of selling dollars on the countrys reserves at a time when the fiscal deficit is already widening is not something the central bank would want, said a trader with a private bank.

With oil prices touching record highs, inflation steadily on the rise and weakening in the stock market, traders are not too optimistic about the rupee. We could see the rupee breach the 43-mark soon if RBI-intervention stops, added the trader. RBI has started selling dollars to oil-companies directly, in an attempt to ease dollar-buying pressure on the open markets. However the pressure on the market is now coming from fears of capital outflows.

Meanwhile, bond yields rose, rising inflation and tightening liquidity affected the market sentiment. Yields on the 10-year benchmark bond yield, the 8.24% bond maturing in 2018, ended the day at 8.28%, rising from Fridays close of 8.23%. According to market sources, the sentiment has become extremely bearish, with dealers expecting the central bank to tighten rates sometime soon.

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