News: Rupee at 20-month high on tight cash supply

(RTR 26/03/2007) Mumbai - The Indian rupee charged to a 20-month high on Monday as banks sold dollars to raise funds to tide over a cash shortage in the money market.

Traders also said a foreign bank exercised a large option contract at around Rs 43.50 per dollar, which caused the rupee to spike in early trade to a high of Rs 43.35, its strongest level since July 22, 2005, according to Reuters data.

At 10 a.m. (0430 GMT), the partially convertible rupee was at Rs 43.37/38, up smartly from the previous close of Rs 43.56/57.

"Call rates are still quite high, and the message from the central bank is clearly that liquidity is going to remain tight, which is driving up the rupee," said a dealer at a private bank.

The interbank overnight rate was trading at 13-14 per cent on Monday, compared to 6-7 per cent when cash conditions are normal, but still well below last week's highs of 70 per cent when corporate tax payments of around Rs 30000 crore ($ 6.9 billion) caused a cash crunch in the system.

To generate funds, dollars were sold in the forex market, which caused a spurt in the rupee.

This week the central bank will sell Rs 6000 crore of market stabilisation scheme bonds, which will keep cash conditions tight and could push the rupee higher.

Still, traders said that the rupee's gains could be limited as month-end demand for dollars from oil importers kicked in. Oil is India's largest import.