Rupee opens higher on drop in oil
By ranjanp at 5 August, 2008, 12:46 am
STORY HIGHLIGHTS
- Rupee opens 0.5% higher than close on Monday - 42.28/29
- Falling oil prices, RBI's attempts to control inflation by increasing the lending rates helping the rupee gain strength
- Capital outflow, weakening Indian markets remain a concern
Mumbai - The rupee strengthened on Tuesday as global oil prices fell to near three-month lows, calming nerves about a widening trade deficit. Yesterday, the rupee had fallen by 14 paise to close at 42.40 against the dollar due to buying by banks and sluggish equity markets.
The rupee was at 42.28/29 per dollar, 0.5 percent stronger than the close on Monday. Oil is at near three-month lows around $120 a barrel as concerns over tight supplies eased amid evidence of rising OPEC output and declining U.S. demand in the face of a weak economic outlook.
The dollar-rupee movement is largely expected to be determined by how the Indian markets perform in the near term. The BSE Sensex opened down and then seesawed between gains and losses as lower oil prices eased concerns about inflation, but worries about the health of the global economy and financial sector still remain. Traders and dealers are reluctant to go long on the rupee due to sustained capital outflows.
The rupee may also have received a boost from the recent move by the central bank’s to raise the lending rates to stem the rising inflation. The Reserve Bank of India last week announced a hike in its key interest rates in a move to tame prices that are currently hovering around 13-year highs and said it aims to pull inflation down to levels close to 7.0 percent by March 2009.
In its quarterly monetary policy review, the central bank raised its key repo rate, the rate at which it lends money to banks, by 50 basis points to 9 percent with immediate effect.
The RBI also plans to increase the statutory cash reserve ratio — the level of mandated reserves to be maintained by banks — by 25 basis points to 9 percent from Aug. 30. Since April, Indian central bank has hiked the repo rate by 125 basis points and the cash reserve ratio by 150 basis points.
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