Dealers said the rupee appreciated against the dollar with the exchange rate falling to as low as 114.05/15 yesterday while interest rates were picking up driven by an increase in state demand for finances, state agents borrowing at slightly higher rates and a rise in dollar sales by some banks.
Dealers speaking to the Island Financial Review said the rupee was under some pressure to appreciate as the market anticipated some dollar inflow while some banks converted their dollar holdings into rupees in anticipation of higher returns on government securities.
The rupee began to trade on Thursday morning at around 114.30/35 against the dollar.
"The exchange rate fell to around 114.05/15 in the morning and then settled at around 114.17/25," a dealer said.
"Demand for dollars has fallen as the market is anticipating inflows into government bonds. A foreign bank who had sold bonds to foreign entities also sold the dollars to the market because interest rates on rupees are expected to improve," he said.
Usually the Central Bank announces a trading band for the exchange rate, but dealers said the bank presented a downside bid later during the day, which brought the exchange rate up to 114.10/12 levels.
Meanwhile, government demand for domestic financing continued to drive interest rate expectations.
A dealer said the government was continuing to seek domestic financing with state agents borrowing at rates slightly higher than market rates.
"Overnight interbank rates are improving as state agents are offering to borrow at slightly higher rates for the government. We already saw short term benchmark Treasury bill rates increase at this week’s auction," he said.
Since November 2009, Treasury bill rates have been inching up every week at the primary auction.
This week, the three month Treasury bill rate inched up to 8.38 percent from 8.26 percent a week ago, the rate of the six month bill inched up to 9.12 percent from 9.06 percent. The twelve month bill remained unchanged at 9.47 percent.
"This is an indication that the government is demanding for more short term financing," a dealer said.
Source: The Island online
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