The Indian rupee surrendered gains on Thursday as stocks dropped on worries about fallout from the US subprime mortgage sector, and traders said the central bank may sell while it was weak to push it away from nine-year highs.
European stocks led other market lower after BNP Paribas froze $2.2 billion worth of funds, citing the subprime woes. The worries over problems in credit markets saw investors pare risk by selling high-yielding currencies, and an unwinding of carry trades sparked a surge in the yen.
The rupee ended at 40.53/54 per dollar, off an intraday high of 40.39 but just softer than Wednesday's close of 40.5250/5350. It hit a nine-year high of 40.20 in late July. "Dollar/yen has moved up by one big figure in the day and local stocks have fallen by more than 400 points from its early peaks," said a local trader.
"This is not a good sign and we will see a gradual move towards 41 per dollar, which will be the next key support level for the rupee," she said. The rupee had risen in early deals despite an increase in the central bank's intervention firepower.
The ceiling on market stabilisation bonds (MSS), which are used to absorb rupee funds generated by currency intervention, was raised to 1.5 trillion rupees ($37 billion) from 1.1 trillion rupees late on Wednesday. It followed Tuesday's curbs on foreign borrowings by local firms in a bid to try to check some of the huge capital inflows that have driven the rupee higher this year.
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