Rupee posts biggest single-day gain since 1998

The rupee posted its biggest single-day gain in more than a decade on Tuesday, driven by another rise in shares, heavy dollar sales by a larHow are exchange rates determined?
ge corporate, and the unwinding of long dollar positions by banks.

The partially convertible rupee closed at 47.69/71 per dollar, 2 percent stronger than 48.64/65 at Monday's close. Last week, the rupee had dropped to a record low of 50.29.

It was the biggest single-day gain for the rupee since Jan. 19, 1998, when the rupee had risen 3.6 percent after the central bank had taken a number of steps including a hikes in the cash reserve ratio, repo rate and bank rate.

"There was a lot of dollar supply and no real demand in the market," said Agam Gupta, head of forex trading at Standard Chartered Bank. Dealers said dollar inflows from a large pharmaceutical company also helped the rupee rally.

Shares rose 2.8 percent on Tuesday, a fifth straight gain that took them to their highest close in two weeks, on hopes that cuts in bank lending rates would help credit flow more freely and ease a cash squeeze.

Foreign funds bought nearly $500 million of stocks over Friday and Monday. They have sold a net $12.6 billion worth of Indian shares so far in 2008, helping push the rupee down more than 17 percent.

They bought a record $17.4 billion in 2007, when the rupee rose 12.3 percent. "The unwinding of long dollar positions based on the non-deliverable forward rates resulted in large stops being triggered, which led to the all-round dollar selling," the chief dealer with a state-run bank said.

"Closing below 47.75 looks bullish for the rupee, it may strengthen beyond 47 per dollar if it holds near these levels tomorrow," he added. One-month offshore non-deliverable forward contracts were quoting at 48.02/22 per dollar, weaker than the onshore spot rate, but much stronger from 51-52 levels seen last week, indicating some improvement in rupee sentiment.

Source: EconomicTimes