MUMBAI, November 21:The foreign exchange market was taken over by "speculative elements" during the last 15 minutes of trading. The rupee which had found a cushion at 37.50 for the past three days, broke all barriers in a sudden spurt of speculative activity to close the day at 37.80/85 - an intra day fall of 40 paise.

The Reserve Bank suprisingly remained silent and allowed the rupee to weaken. An RBI spokesperson later said, "speculative elements dominated the market towards the end of the day's trading due to some non-economic development reported by a news wire agency. This led to the sharp weakening of the rupee".

The non-economic development was a news report that said that the government (led by the UF) is ready to face elections.

"Political instability created panic among a few corporates which saw banks jump into the fray. It was crazy in the last few minutes as all barriers fell like nine pins," a dealer with a foreign bank said. Dealers said that the central bank was taken by surprise. "I feel they did not expect such a sharp weakening", the dealer said. Most treasury chiefs feel that the apex bank will come out a fresh and strong dose of intervention before trading opens on Monday. "I am sure that if the RBI stays away the rupee will touch 38 in a matter of few minutes", a dealer in a private sector bank said.

The rupee remained stable and calm for most of the day and moved in a narrow groove of 37.46/50. The apex bank pumped in an estimated $ 150 million in spot as soon the rupee showed signs of crossing 37.50 and another $ 50 million in the forward market (May maturities) today. "This took care of the forex market before this sudden outburst of dollar demand", a dealer said.

"The market towards the end of the day's trade becomes very thin and a few corporates along with some banks took full advantage of it and drove the rupee down. The demand at most must have been $ 50 million but so thin was the market that this seemed to be a very large amount", a treasury head working with a leading corporate said. As a result, near forwards rose during the end of the day and premia for January rose to 50/52 paise from yesterday's close of 48/52, February premia rose to 71/73 from yesterday's close of 68/71 and March premia rose to 95/98 paise from yesterday's close of 91/93 paise. The six month forwards remained at 7.2 per cent -- not much movement from yesterday's close of 7.24 per cent.

The rupee's fall in the last few days has been attributed to various factors, particularly sustained heavy dollar demand from the corporate sector.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.