The Indian rupee rose against the U.S. dollar Thursday, passing a key psychological level, but not before it stumbled to touch an all-time low for a seventh consecutive session.
Indranil Mukherjee/Agence France-Presse/Getty Images
An employee counts rupee notes at a bank in Mumbai, May 16.
The dollar was at 55.65 rupees late Thursday in Asia, compared with 56.00 rupees late Wednesday. It scaled a new peak of 56.37 rupees earlier in the day.
The rupee weakened in early trade as investors region-wide shunned risky assets after European leaders struggled to overcome differences on ways to resolve the euro zone's crisis. The euro hit its lowest in 22 months against the dollar.
But suspected dollar selling by the Reserve Bank of India and buoyant stocks managed to put a floor under the rupee.
Investors moved swiftly to sell out of the greenback after RBI Governor Duvvuri Subbarao said the central bank hasn't ruled out selling dollars directly to oil importers to ease pressure on the rupee.
Such a move could isolate a key source of dollar demand from the market and boost the rupee, analysts say, while expressing concern over the central bank's frequent interventions in the foreign-exchange market.
"Foreign exchange intervention is increasingly becoming counter-productive as it only breeds questions about adequacy of reserves," Indranil Sen Gupta, an economist at Bank of America Merrill Lynch, said in a note.
"Besides, we do not expect the RBI to waste too much precious foreign exchange to fight cross-currency pressures from the U.S. dollar," he said.
The rupee may recover to 50 or 52 to a dollar when the euro climbs to 1.30 or 1.35, he said. The euro was quoting at 1.2582 to the dollar at 1255 GMT.
In the government debt market, bonds gained as state-run fuel retailers increased gasoline prices by 11.5% from Thursday. The benchmark 8.79% 2021 bond ended at 101.87 rupees, up from 101.79 rupees Wednesday.
Economists said the gasoline price move is a step in the right direction, but not enough and the government must raise prices of diesel, kerosene and cooking gas for a meaningful fiscal impact.
"Since gasoline prices are technically decontrolled, the hike will not impact the fiscal subsidy bill," Nomura economist Sonal Varma said.
The government doesn't provide any subsidy on gasoline as oil companies are free to decide the fuel's prices. The government, however, compensates the companies for selling diesel, kerosene and cooking gas at state-set prices that are usually below cost.
Increasing prices of other fuels will make the oil import bill more elastic as consumers ration demand, Ms. Varma said.
