Re Falls as ECB Cuts Rates, may Slip Further

The rupee fell for the third straight day after the European Central Bank presented a bleak economic picture as it cut interest rates to a record low, pushing investors to seek safety in US Treasuries and German bonds. But money market pressures are easing. The currency that gained for four straight sessions in the run-up to an auction of permits for foreign institutional investors to buy government bonds is slipping, drawing the RBI to sell dollars, traders said.  With lukewarm response from investor to bid for those bonds, importers are worried that the US dollar inflows may slow and that pressure on the currency could return. The rupee closed at 55.42 to the US dollar, down 0.9% from the previous close of 54.95. It swung in a range of 54.25 to 54.68 with high volumes that made the RBI step in to reduce the volatility.  Since investor sentiment has been dented further with the lower-than-expected job additions in the US, the rupee may resume its slide, probably to a new low if the government does not come up with concrete measures to fix its finances. "The dollar-rupee should trade in a narrow range next week, with intervention at higher levels and good amount of buying at lower levels," Ashtosh Raina, head of forex trading at HDFC Bank, was quoted as saying by Reuters.  But the pressure on the Indian money markets is easing with banks' borrowing from the central bank falling to multi-year lows as they access more funds through higher export credit refinance that was raised to 50% from 15%. Banks borrowed just . 11,530 crore from the RBI, down from about . 98,000 crore on Tuesday.  Though the easing pressure may set the stage for lower interest rates, analysts warn that it may be too early to conclude. "Liquidity deficit may not disappear, with average liquidity deficit hovering around . 50,000 crore to . 1 lakh crore till September and may spike temporarily above that in September owing to advance tax outflows,'' says Madhavi Arora at Karvy Research.