Rupee extends losses on RBI governor remarks

The rupee extended losses on Tuesday after the RBI Governor said special market operations with oil companies are ceasing, sparking concern the firms will buy more dollars from the market.

At 4:15 pm the partially convertible rupee was at 42.73/74 per dollar, off an high of 42.5150 and weaker than 42.55/56 at close on Monday.

The central bank since May 30 has been providing foreign exchange to oil companies to pay for their crude imports by exchanging oil bonds held by them, which it plans to stop.

"The special market operations that we have undertaken in terms of oil bonds from IOC (Indian Oil Corp) and other oil companies, I think we have already told them that the facility is ceasing," RBI governor Yaga Venugopal Reddy told a news conference following the quarterly policy review.

Shares fell 3.9 percent on Tuesday, to its lowest close in 10 days, on concerns an unexpected aggressive monetary tightening by the central bank to quash double-digit inflation would slow economic growth.

Foreign funds have sold a net $6.6 billion worth of Indian shares so far this year, after having bought a record $17.4 billion in 2007.

RBI raised its key lending rate for the third time in two months on Tuesday, taking it to its highest in seven years to quell price pressures, dampen demand and keep inflation expectations in check.

The central bank raised its short-term lending rate, known as the repo rate by 50 basis points to 9 percent and increased the cash reserve ratio, or the amount of deposits banks have to keep with it, by 25 basis points to 9 percent

Rupee seen at 42.50 per US Dollar by end 2008: HSBC

The rupee may rise to 42.50 per dollar by the end of 2008 as the Reserve Bank of India's determination to cap the local unit's weakness was broadly in line with its policy stance and supported its efforts to fight inflation, HSBC said in a recent note.

HSBC estimated the Reserve Bank of India (RBI) unwound about $4.5 billion of forex reserves in June to curb the rupee's fall.

"Though the scale of intervention to ameliorate the weakening currency is unprecedented, this intervention policy is likely to be sustainable at least in the coming months," HSBC said.

India's foreign exchange reserves fell to $308.397 billion in early July from $315.660 billion at the beginning of June.

But HSBC warned that near-term fundamentals still did not favour the rupee, with recent political developments adding to adverse factors.

A median of a poll of 12 traders and economists earlier this month showed the rupee would be at 43 per dollar by the end of December, pressured down by record high oil prices and outflows of foreign funds from the stock market.

HSBC was not part of that poll. At 1:07 p.m., the partially convertible rupee was at 42.83/84 per dollar, stronger than its previous close of 43.87/88. It hit a 15-month low of 43.50 earlier this month.