MUMBAI, NOV 6: The foreign exchange market turned volatile today as the spot rupee fell below the psychological barrier of Rs 36.40 to close at Rs 36.45 against the dollar largely due to the withdrawal of the GAIL's overseas offering.

The spot rupee opened at Rs 36.38 and weakened to touch Rs 36.46 amidst sustained buying by banks on behalf of their corporate clients. Explaining the market perception that the rupee will weaken against the greenback, V Ravikumar, chief dealer at ABN Amro Bank, said that the deferring the GAIL's GDR issue had the expected effect of dollar supplies tapering down.

``Moreover the governor of the Reserve Bank hinted that the India will moving towards a policy of competitive devaluation,'' Ravikumar said.

``The market expects the rupee to weaken further as the volatile stock and currency markets worldwide will see foreign institutional investor (FII) inflow slowing down,'' a currency dealer in a private sector bank said. Dealers attributed the weakeness to sustained corporate demand. ``They are covering all their urgent exposures,'' a dealer said.

Forex players are of the view that the gradual weakening of the rupee has started. ``Towards year end when FIIs start remitting their funds, rupee will weaken further,'' Ravikumar said. The forward premium on dollar which has been climbing since Wednesday went up further on perceived rupee weakness. Six monthly forwards which gained by 30 basis points on Wednesday to touch 6.70 per cent went up further 7.20 per cent today. ``FII inflows are set to taper off and with the GDR money not coming in, expected supply of dollars are not going to come,'' said a dealer, adding that corporates are therefore covering before dollar supplies run out.

The RBI refrained from intervening in the forex market. The RBI governor said that the central bank will intervene only if there is a high degree of volatility.

Volatility hit the money market also as call rates crossed 9 per cent to touch 9.50 per cent. ``A lot of banks availed themselves of the refinance facility today as rates crossed the 9 per cent mark,'' a money market dealer said. Dealers attributed the sudden rise in the call rates to the squaring up of position ahead of reporting Friday. ``Moreover a lot of money is locked into short term repo and 14 day treasury bills which is why call rates are ruling high,'' said a treasury chief in a private sector bank. Moreover, security prices of gilts fell by 5-10 paise across the board.

Securities like 12.59 per cent maturing in 2004, 11.83 per cent gilt maturing in 2003 and 11.15 per cent gilt maturing in 2005 fell in late day trades, dealers said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.