Mumbai: The central bank's defence of 95.45 to a dollar will set the tone for the rupee this week, traders said, after Mint Road likely sold dollars last week to prevent the local currency from breaching that level.
Traders are also tracking crude oil prices closely, as the West Asia crisis threatens to lift prices and intensify dollar demand from oil companies and importers, adding pressure on the rupee just as the FCNR(B) mobilisation drive enters its final stretch.
The rupee closed at 95.42 on Friday, within striking distance of the 95.45 level that the Reserve Bank of India (RBI) was seen defending last week. It has come off the lows nearing 97 to a dollar, but still remains on a depreciating slope against the US currency over the past fiscal year and the present.
The RBI move to close its FCNR(B) deposit window on August 31, a month earlier than planned, will keep dealers watching how aggressively the central bank steps in to support the rupee, particularly after the RBI sold dollars every day last week to keep the currency move in a narrow band - between 95.17 and 95.45 - on all five trading sessions.
"I expect the RBI to come in. Last week, it did not let the rupee cross 95.45, so we will all be in a wait-and-watch mode Monday morning," said Anil Bhansali, head of treasury, Finrex Treasury Advisors. "There will be massive dollar demand from importers and oil companies. The only unknown is how much the RBI would intervene, and positions would be taken depending on the RBI's intervention."
The rupee had strengthened to 94.23 in June from a record low of 96.96 in late May after the RBI announced the special scheme to attract foreign inflows.
The currency has failed to appreciate meaningfully despite the $52 billion of inflows under the special FCNR deposit window over the past one-and-a-half months, leaving oil prices and the Reserve Bank of India intervention as the bigger near-term drivers.
Market participants expect the pace of inflows to pick up over the remaining two weeks, which could provide some support to the rupee.
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"I am not ruling out appreciation toward 94, but it all depends on oil prices. If oil cools down to the 70 handle, the rupee can appreciate," said Anindya Banerjee, head of currency research, Kotak Securities. "In terms of flows, they do tend to pick up in the last couple of weeks, but there has been no material effect until now; so I don't know what difference inflows over the last two weeks would make."
Brent crude futures, around $89 a barrel for October delivery, have climbed nearly 6% in a week amid a fragile truce in West Asia. Although oil has come off the highs of around $120 a barrel, the recent trend points toward further hardening in energy prices.
