The Indian rupee bounced back on Friday, as traders sold dollars to generate funds to overcome a slight cash squeeze in the money market. A severe cash shortage in the banking system earlier this week had prompted traders to dump dollars to meet their daily cash requirements. This had helped the rupee test a 19-month high.
The rupee ended at 43.56/57 per dollar, strengthening from the previous close of 43.73/74. On Wednesday, the rupee had hit 43.44 - its highest since August 2005. "The market still perceives some tightness in the money market and banks liquidated some of their dollar holdings to generate rupees," a private bank trader said.
The overnight call rate ended at 11-12 percent, up from 8 percent in early trade but below the previous close of 10-15 percent. It had touched 70 percent on Wednesday, a result of outflows worth an estimated 300 billion rupees ($6.9 billion) due to tax payments by companies last week.
Traders also said Indian companies sold dollars they had raised abroad as loans, and that investment flows remained strong, lending support to the local currency. The rupee received a further fillip after the yen rose across the board on Friday, reversing losses made earlier this week as investors bought back the Japanese currency they sold to buy higher-yielding assets.