Rupee reverses gains on weak local shares, euro

The rupee reversed early gains and ended marginally weaker on Wednesday as the euro slipped against the dollar and local shares extended losses, while dollar demand from oil importers also dampened sentiment.

The partially convertible rupee ended at 44.77/78 per dollar, weaker than Tuesday's close of 44.73/74, after rising as much as 44.6650.

"In the morning, there was selling on account of NDF (non-deliverable forwards) arbitrage in six-month maturity. Once the selling ceded, the market started tracking a fall in equities and euro," said Pramod Patil, senior forex dealer at State Bank of Mauritius.

The euro fell 1% against the dollar on Wednesday after euro zone ministers failed to agree on how to tackle the Greek debt crisis and Moody's threatened large French banks with possible downgrades.

The euro was at USD 1.4307 at the end of local forex trade and the index of the dollar against six major currencies was up 0.84% at 74.953 points.

Indian shares fell nearly 1% to a three-week closing low on Wednesday, with banks leading the decline as investors braced for a likely interest rate hike at the central bank's policy review on Thursday.

Foreign funds have sold a total of USD 161 million of local shares over Friday and Monday, after buying a total of around USD 80 million of shares in the three sessions to last Thursday.

Traders said the Reserve Bank of India's (RBI's) rate decision on Thursday was in focus as it will impact local shares and in turn lend direction to the rupee.

The RBI is expected to raise its policy interest rate by a total of 75 basis points for the rest of 2011, including a 25 basis point increase on Thursday, unchanged from forecasts on May 3, a Reuters poll found on Tuesday.

Oil importers' demand for the greenback also weighed on the local unit. Oil is India's largest import item and oil exporters are the largest buyers of dollars in the local market.

Oil fell on Wednesday after euro zone ministers failed to reach agreement on a second bailout for Greece, deepening worries over the health of the European economy and depressing the euro against a rising dollar. [O/R]

The one-month onshore forward premium was at 25.50 points versus 26.25 at last close. The three-month was at 78 points from 76.25 and the one-year was at 268.75 points versus 269.50.

One-month offshore non-deliverable forward contracts were quoted at 44.99, weaker than the onshore spot rate.

In the currency futures market , the most traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and on the United Stock Exchange were at 44.8825, 44.8850 and 44.8800 respectively, with total volume at USD 7.94 billion.