The Indian rupee ended sharply lower against the US dollar on Tuesday after recording the worst intraday fall in over three weeks as banks persistently bought the greenback.
The domestic currency weakened 49 paise to close at 87.20 against the greenback, according to Bloomberg data. It settled at 86.71 a dollar on Monday.
The Indian unit opened 14 paise lower at 86.85 against the greenback as the dollar index recovered losses from Monday. Intraday, the rupee slumped 55 paise to the day's low of 87.25 a dollar, marking the biggest intraday fall since Feb. 3.
Purchases of the US unit started at 86.90 level as market participants were worried that the Reserve Bank of India may not protect the Indian unit from sharp depreciation due to liquidity crunch in the banking system, according to Vivek Shah, foreign exchange spot and forward markets dealer at LCR Forex Brokers Ltd.
To address liquidity issues in the banking system, the RBI announced a $10-billion rupee-dollar swap set for Friday. While this move aims to boost liquidity, it could also increase the supply of rupees, exerting downward pressure on the rupee, according to Amit Pabari, managing director of CR Forex Advisors.
"If they (RBI) intervene in the spot market, there will INR liquidity crunch. Once it broke 87.00 and 87.05 a dollar levels, stop losses were triggered. And there was slight panic buying," Shah said. "Falling below 87.20–87.25 (a dollar) level, RBI came into sell."
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