Rupee rebounds on China fund report, EU deal

The rupee recovered from the day's lows on Friday after European leaders reached a deal on tighter euro zone budget rules, and on reports that China's central bank plans to create a new vehicle to manage investment funds.

But demand for dollars from oil importers continued to drag on the currency, traders said. India imports more than three-fourth of its oil requirements and local refiners are the biggest buyers of dollars in the domestic currency market.

The rupee had dipped to its lowest level in more than a week on scepticism that a deal could be reached on euro zone fiscal reforms. The partially convertible currency closed at 52.03/04 per dollar, down sharply from its close of 51.75/76 on Thursday, after dipping to 52.35 in early trade -- a level not seen since November 30. It traded between 51.98 and 52.35.

"Rupee buying emerged after a deal was reached among European leaders and on speculation of a new Chinese investment vehicle," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.

China plans to create a new vehicle to manage USD 300 billion of investment funds to improve returns on the world's largest stockpile of foreign exchange reserves, a source with knowledge of the matter told Reuters.

"The future direction of rupee is dependent on how the euro moves," a dealer with a foreign bank said. "If the euro falters, then the USD/INR pair may test the 54.00 per dollar level. RBI intervention remains key in such a scenario."

Traders said the rupee was also dented by concerns about the economy after the finance ministry cut its economic growth forecast for the current fiscal year.

In a mid-year economic review presented in parliament, the government said the economy is now expected to grow around 7.5%, sharply lower than the original estimate of 9%.

The 30-share BSE index .BSESN fell 274.78 points to 16,213.46, with 27 of its components in the red. The benchmark fell as much as 2% during the day. The index lost 3.76% for the week.

Reserve Bank of India Governor Duvvuri Subbarao said on Thursday that the rupee was always on the RBI's radar and that the central bank would intervene only to manage volatility.

A day earlier, Subir Gokarn, a deputy governor at the RBI, had said the bank did not want the current fall in the rupee to spiral out of control.

The rupee hit a record low of 52.73 on November 22 and has shed more than 14% of its value this year to remain the worst performer among major Asian currencies.

One-month offshore non-deliverable forward contracts were quoted at 52.02, below the onshore spot rate and indicating a bearish near-term outlook.

The one-month onshore forward dollar premium was at 31.00, compared with 28.50 on Thursday, while the three-month was at 77.25, up from 73, and the one-year premium was at 226.25, up from 211.50.

In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange were all at 52.25. Total volume was USD 5.05 billion.