Re ends at 9-yr high on Fed rate cut

The rupee hit a nine-year high on Wednesday as a sharp cut in interest rates by the US Federal Reserve increased appetite for emerging market assets and a surging stock market attracted capital inflows.

 

Dealers said the rupee's gains were capped by heavy dollar-buying intervention by the central bank. The rupee ended at 40.20/21 per dollar, having risen to 40.18 during trade, its highest since May 1998.

 

The rupee gained more than half a percent from Tuesday's close of 40.48/49, and has risen more than 10 percent this year. The currency's previous high of 40.20 was hit in July.

 

"Exporters got panicky and were selling their dollars throughout the day, and inflows are expected to be robust as evident by the soaring stock markets," said V Soundarajan, a currency trader at UCO Bank.

 

"I expect the rupee to break past the 40 per dollar mark before the end of this month," he said. The stock market rose 4.2 percent, its biggest gain in 15 months, to a record-high close on hopes that the US rate cut would help steady global credit markets and see foreigners return to emerging markets such as India.

 

As well, Tuesday's cuts in US interest rates raised India's interest rate premium over the United States to 300 basis points, which traders said would attract more capital inflows and add to the rupee's momentum. But those inflows complicate policy for the Reserve Bank of India, which has been intervening as the rupee rose this month and stepped in again as the currency neared its highs.

 

"They bought at every level. I think they are going to protect it," a chief dealer with a foreign bank said. A Reserve Bank of India spokeswoman said the central bank did not comment on the day-to-day movements on the exchange rate. Data this month showed the central bank bought $11.4 billion in intervention in July, when the rupee was last near current levels, taking its dollar purchases in 2007 to 38.1 billion.

 

The US Federal Reserve lowered its benchmark federal funds target rate by 50 basis points to 4.75 per cent to shore up the world's largest economy against a housing slowdown and credit market turmoil. It also cut the discount rate it charges for direct loans to banks by a half-point to 5.25 per cent.