Indian Rupee Falls To Three-Week Low; Bonds Rise On Buyback

The Indian rupee fell to a three-week low against the U.S. dollar Friday, as oil importers bought the greenback in the wake of the recent spike in global crude prices.

The greenback's global strength also weighed on the Indian currency.

The dollar was at INR49.50 in late trade, compared with INR49.21 late Thursday. It rose to a high of INR49.56, a level last seen Feb. 10.

Rising oil prices amid India's widening trade deficit brought back the long-term concerns for the Indian rupee.

India's trade deficit in January widened to $14.8 billion from $10.3 billion a year earlier as export growth slowed due to falling global demand. Imports, oil as well as non-oil, continued to grow, data showed Thursday.

"Considering the global growth uncertainty, we believe that any sudden stop or reversal in [capital] flows can result in increasing macro stability risks," Tanvee Gupta Jain of Macquarie Research said in a report.

"We expect the current account deficit to widen to $66.8 billion [3.6% of gross domestic product] in FY12 from $45.9 billion [2.7% of GDP] in FY11," she added.

India depends on capital inflows to fund its current account deficit.

Meanwhile, Indian sovereign bond prices rose Friday after a successful bond buyback in late trading hours eased some concerns about the liquidity tightness in the banking system.

But the upside was limited because of the cash crunch, which is still way above the central bank's comfort level, and renewed inflationary concerns after the oil price spike.

The benchmark 8.79% 2021 bond ended at INR103.71, compared with Thursday's INR103.62.

Indian banks have borrowed on average about INR1.80 trillion every day this week from the central bank at 8.5%, underlining the severity of the liquidity crunch.

The central bank is comfortable with a borrowing number around INR600 billion only, three dealers said.

A large section in the market believes a cut in banks' cash reserve requirement is likely even before the central bank's March 15 policy meeting to tide over the deficit.