RBI move to reduce pressure on rupee: Citi

Citigroup India, in a note released on Wednesday said the Reserve Bank measures announced last evening would help reduce the pressure on rupee.

Rohini Malkani, economist, Citigroup India said the RBI could become more active in the coming months.

She said given the volatile market situation, near term rupee weakness is likely to continue and could trade in the Rs 45-47 range. But over a longer term , ''we maintain our rupee appreciation view and expect the unit to trace back to Rs43-44 levels by March 09.'', she said.

Rupee which almost touched 47 mark on Tuesday recovered today to 46.34 levels.

According to Malkani, the key reasons for the 10 per cent depreciation in rupee in the past month were the strong dollar rally and acute dollar shortage in the local market coupled with the dis-continuation of the Special Market Operation Scheme (where RBI provided dollars to the oil companies in lieu of oil bonds).

The dollar shortage was a result of continued portfolio flows, offshore demand and demand from oil companies, she said while adding that exporters are now holding back from selling.

Global Confidence Falls as Lehman, AIG Roil Financial Markets

Confidence in the global economy fell in September as financial turmoil deepened in the U.S., a survey of Bloomberg users on five continents showed.

The Bloomberg Professional Global Confidence Index fell to 11.3, from 14.1 in August. Confidence among U.S. respondents fell to 10.6 from 18.2, while the Western European measure was at 12.6 after 12.9. A reading below 50 indicates pessimism.

A yearlong credit squeeze culminated in the past two weeks with the bankruptcy of Lehman Brothers Holdings Inc. and the bailout out of Fannie Mae, Freddie Mac and American International Group Inc. Overnight borrowing costs soared as banks hoarded cash.

``We moved from Fannie and Freddie to Lehman to AIG, and even today, one question is: who is going to be next?'' said Simon Barry, an economist at Ulster Bank in Dublin, who participated in the survey. ``A lot of these risks haven't gone away.''

The MSCI index of global financial shares has declined 10 percent since early last week. The U.S. Federal Reserve yesterday said it would lend the country's biggest insurer, American International Group Inc., $85 billion to avert the worst financial collapse in history. A day earlier, Lehman Brothers filed for bankruptcy and Merrill Lynch & Co. agreed to be taken over by Bank of America Corp.

About 3,500 Bloomberg users from Tokyo to New York posted responses between Sept. 8 and Sept. 12 as investors absorbed U.S. Treasury Secretary Henry Paulson's decision to bail out Fannie Mae and Freddie Mac, the lenders which own or guarantee $12 trillion of U.S. mortgages.

Credit Losses

Banks worldwide have tallied more than $500 billion in losses and writedowns since credit markets seized up a year ago.

``We haven't experienced anything like this since 1929,'' Former European Central Bank chief economist Otmar Issing, 72, said in a Bloomberg Television interview yesterday. ``Global growth will slow and is already slowing. But overall, the risks have mostly been confined to a few industrialized countries.''

Bloomberg users increased expectations that lower oil prices will allow central bankers to pare interest rates as the economic outlook deteriorates. In Germany, the measure for central bank- rate expectations fell to 34.1 from 42.7, signaling respondents in Europe's biggest economy now anticipate that the European Central Bank may cut its key rate in the coming six months. The gauges also declined in the U.S., Japan, and the rest of the euro region.

The price of oil fell by a third since touching a record $147.27 in July and traded at $93.26 a barrel in New York at 10:42 a.m. Central European Time today.

Timing of Recovery

``For global business confidence to improve two things are needed: the U.S. housing market to bottom out and a sign that the financial turmoil is nearing an end,'' said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo. ``That won't be until around the second quarter in 2009.''

The cost of borrowing in dollars overnight more than doubled yesterday as banks hoarded cash amid speculation more financial institutions will fail. The overnight dollar rate soared 333 basis points to 6.44 percent, its biggest jump, according to the British Bankers' Association.

The euro region and the Japanese economies both contracted in the second quarter, while the European Union says the U.K. will suffer a recession in the second half of the year. In the U.S., unemployment jumped to 6.1 percent in August, the highest in five years.

Respondents in Japan were the most pessimistic about the global outlook. Participants in Spain, which the EU says faces its first recession in 15 years, were the gloomiest about their economy, with a reading of 4.1, followed by the U.K. Participants in Brazil remained the most optimistic about their economy, at 58.2.

Rupee trades at 46.28 per dollar

Mumbai: The rupee rose by 60 paise to 46.28 against the US dollar in early trading today, paring yesterday's record loss of 90 paise on expectations that the Reserve Bank may intervene to stem the rupee fall.

The rupee resumed stronger at 46.38/40 a dollar from Tuesday's close of 46.89/90 a dollar, aided by a recovery in stock prices in other Asian exchanges and the RBI moves to augment dollar supply.

The RBI yesterday asked public sector banks to raise dollar deposit rates for non-resident Indians and said it would continue to sell dollars as the rupee continued to slide.

RBI also decided to allow banks to borrow more by relaxing the statutory liquidity ratio (SLR) to ease the liquidity crunch and bolster the sliding currency. The central bank also expanded the liquidity adjustment facility scheme.Foreign banks are also reported to have sold dollars in the forex market after the RBI's steps to cool the financial markets.

The rupee had lost Rs2.29, or 5.13 per cent, in the last six days alone amidst heavy capital outflows and heavy dollar demand.

Foreign funds have so far sold a net $8.4 billion worth of stocks, driving the rupee down more than 15 per cent so far in 2008.

The dollar's strength against other currencies also seems to have impacted the rupee value.

Yen Falls Against Dollar After Fed Rescue of AIG

The yen fell for a second day against the dollar after the Federal Reserve said it will lend as much as $85 billion to American International Group Inc., helping prevent credit markets from seizing up.

Japan's currency also dropped versus the Australian and New Zealand dollars on speculation an AIG rescue will encourage investors to resume taking out loans in Japan to buy higher- yielding assets elsewhere. The yen jumped the most in a decade against the greenback on Sept. 15 as mounting credit-market losses forced Lehman Brothers Holdings Inc. to file the biggest bankruptcy in history, sparking a global stocks rout.

The Fed's loan is ``likely to support the U.S. financial system and avert a catastrophe,'' said Kenichiro Ikezawa, who helps oversee the equivalent of about $3 billion as a fund manager at Daiwa SB Investments Ltd. in Tokyo. ``Risk-taking appetite will probably recover a bit. Sentiment toward the dollar isn't bad, and the yen may be sold.''

Japan's currency fell 0.3 percent to 106.00 per dollar at 7:35 a.m. in London, after sliding 0.9 percent yesterday and surging 3.1 percent on Sept. 15. Against the euro, the yen slid 0.9 percent to 150.64. It touched 147.04 yesterday, the strongest since August 2006. The dollar fell 0.6 percent to $1.4212 per euro.

Australia's dollar rose 3.1 percent to 84.90 yen from late in Asia yesterday, and New Zealand's dollar climbed 3.5 percent to 70.29 yen. The Nikkei 225 Stock Average advanced 1.2 percent, after a 5 percent drop yesterday.

Carry Trades

``A disorderly failure of AIG could add to already significant levels of financial market fragility,'' the Fed said, explaining its decision to lend money to AIG in return for a 79.9 percent stake.

Benchmark interest rates of 7 percent in Australia, 7.5 percent in New Zealand, 8.25 percent in Mexico and 13.75 percent in Brazil compare with 0.5 percent in Japan, making the nations' currencies favorites for so-called carry trades. The Bank of Japan today left its overnight rate unchanged for a 22nd straight policy meeting.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher rates, earning the spread between the two. The yen declined 0.3 percent to 58.6007 against the Brazilian real and weakened 0.5 percent to 9.910 versus the Mexican peso.

``The news is lifting shares and calming investors,'' said Toshihiko Sakai, head of trading in foreign-exchange and financial products at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``They are selling the yen.''

Lower Volatility

Implied volatility on one-month dollar-yen options fell to 16.93 percent today from 17.65 percent yesterday when it touched 19.50 percent, the highest since March 17. Lower volatility may encourage carry trades as it indicates a smaller risk of exchange-rate fluctuations that can erode profits.

Fed Chairman Ben S. Bernanke and his colleagues yesterday rebuffed calls by some investors for an interest-rate cut after Lehman filed for bankruptcy, signaling they will continue to address market turmoil with emergency lending and aim monetary policy at a longer-term economic forecast that may still show the economy is skirting a recession. The benchmark rate was kept at 2 percent.

Further losses in the yen may be limited by speculation Japanese investors will repatriate funds ahead of the Sept. 30 halfway point of Japan's fiscal year, according to Tomoko Fujii, head of economics and strategy at Bank of America Corp. in Tokyo.

`Upside Risks'

``The approach of the Japanese fiscal half-year end will keep domestic financial institutions sidelined in their foreign asset investment or may even foster repatriation,'' Fujii wrote in a research note yesterday. ``Upside risks to the yen will probably persist in coming weeks.''

Bank of America raised its yen forecasts, predicting the currency will trade at 104 per dollar at the end of September and 107 at the end of December. That compares with previous estimates of 108 and 110, respectively, Fujii said.

The dollar may fall before government reports today that are expected to show the U.S. housing market is deteriorating, adding to evidence of a slump in the world's biggest economy.

Housing starts fell 1.6 percent in August to an annual rate of 950,000, the lowest level since March 1991, according to the median forecast in a Bloomberg News survey of 74 economists. Building permits, a sign of future construction, probably fell 1 percent to a 928,000 pace. The Commerce Department will release the two reports at 8:30 a.m. in Washington.

``The source of global financial sector concerns, that is, the U.S. housing market, has not shown signs of a recovery,'' Fujii said.

Rate Cuts

Any gains in the pound and the euro may be limited by speculation European central banks will lower interest rates in coming months as the U.S. slowdown spreads through other countries. The U.K. currency rose 0.3 percent to $1.7881.

The Bank of England will release minutes from its policy meeting ended Sept. 6 at 9:30 a.m. in London. The central bank kept its benchmark rate unchanged at 5 percent. BOE Governor Mervyn King said yesterday inflation will peak ``soon'' and then slow ``sharply'' in 2009.

Economists surveyed by Bloomberg forecast that the European Central Bank will keep its benchmark rate on hold at 4.25 percent this year before cutting it in the first quarter of 2009.

Weaker Pound, Euro

``The pound and the euro will be hit more as more weakness spreads through Europe,'' said Thomas Harr, a senior currency strategist in Singapore at Standard Chartered Plc, the U.K. bank that gets most of its profit from Asia. ``The BOE will start cutting rates quite significantly from the fourth quarter. The ECB will have to follow.''

The pound may fall to $1.58 and the euro may decline to $1.30 by the middle of next year, Harr said.

Luxembourg Finance Minister Jean-Claude Juncker, who heads a group of euro-area counterparts, said today the euro region and Germany, its biggest member, will escape recession even as economic growth weakens.

``I don't see the danger of recession in the deeper sense of the word,'' Juncker told Germany's Deutschlandfunk radio. ``Economic growth will clearly weaken.''