Rupee drops on tighter fx borrowing norms

The rupee weakened on Thursday after the Reserve Bank of India (RBI) tightened some external commercial borrowing (ECB) norms for companies. A lower start to local shares also added to the downward pressure.



At 10:25 a.m. (0455 GMT), the partially convertible rupee was at 46.68/69 per dollar, 0.3 percent weaker than its close of 46.535/545 on Wednesday when it dropped to 46.87 during trade, its weakest since Nov. 27.



"This is just a knee-jeark reaction to the tighter rules, but shares performance is likely to determine further direction," a dealer with a foreign bank said.



The Reserve Bank of India (RBI) said it would withdraw from Jan. 1 some concessions on overseas borrowing for Indian firms introduced during the global credit crisis, although it also eased rules for the infrastructure and telecoms sectors.



"The move is in line with our expectations in terms of nature and timing," economists at DBS Bank Group Research said in a note on Thursday.



"We think the fact that the RBI has begun tinkering with ECB norms may also be taken as a sign that rate hikes are also imminent," they wrote.



DBS expects the central bank to raise the reverve repo rate and banks' cash reserve ratio by 25 basis points each at the Jan. 29 policy meeting and expects a total of 200 basis points of rate hikes by December 2010.



"The rupee is likely to trade in a 46.55-46.80 range for the day. We would see some dollar buying at the lower levels but some initial public offering flows are helping the rupee for now," said Madhusudan Somani, head of forex trading at Yes Bank.

"Prospects of monetary tightening in the near future is also helping the rupee," he said, adding expectations are high on industrial output data due around midday (0630 GMT) on Friday.

sirfpaisa.com