<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[<p>The rupee headed for a second session of gains on Friday, continuing its recovery from the record lows hit this week, after the Reserve Bank of India (RBI) stepped in to defend the currency, while exporters and custodian banks also sold dollars. <br><br>Analysts at Barclays Capital said USD/INR is expected to hover around 56 and 54 to a dollar in one and three months respectively, with an upside risk, before retreating only modestly to around 52 and 51 in six and 12 months.<br><br>With limited improvement expected in the macro fundamentals in the near-term, any pullback in USD/INR is likely to be largely dependent on policy initiatives or an improvement in global risk appetite, says report.<br><br>Barclays expects RBI to eventually float dollar-denominated bonds through state-run banks like the State Bank of India for non-resident Indian investors which could trigger $12-15 billion inflows in a short time frame. FX intervention by the RBI would not offer the INR any meaningful or lasting support, it says.<br><br>Meanwhile, rupee is still headed for an eight consecutive weekly fall, having hit seven consecutive record lows since May 16. Its latest was on Thursday when it fell to as much as 56.40.<br><br>The intense risk aversion from the euro zone has severely pressured the currency, but falls have been magnified by concerns about India's fiscal and economic outlooks.<br><br>A slight easing of that risk-off sentiment -- with the euro inching up from two-year lows against the dollar on Friday -- has also helped the rupee recover over the past two sessions.<br><br>Meanwhile, analysts at Barclays Capital said USD/INR is expected to hover around 56 and 54 to a dollar in one and three months respectively, with an upside risk, before retreating only modestly to around 52 and 51 in six and 12 months.<br><br>The RBI is likely to maintain a more neutral bias in the next one or two policy meetings after the larger-than-expected 50 bps cut in April, cut the repo rate by a further 50-75 bps by March 2013, it added.<br><br><strong>Euro Effect</strong><br>"The euro effect has caused the turnaround in the rupee. Some stop-losses were also triggered, and there were also inflows with custodian banks," said A. Ajith Kumar, a dealer with Federal Bank.<br><br>At 3 p.m. (0930 GMT), the partially convertible rupee was at 55.45/46 per dollar, 0.4 per cent stronger than its Thursday's close. It has moved in a wide band of 55.24 to 56.09 so far in the day.<br><br>The rupee has fallen for eight weeks now, its longest losing streak since the 11 weeks of falls that ended in October 2008.<br><br>The RBI is believed to be looking to hold the rupee above the psychologically key level of 56 to the dollar, and has been seen intervening in the rupee forward markets, alongside its defence of the spot rupee.<br><br>The central bank intervened briefly in spot markets in the morning, while later on, traders said some banks had been selling off their long dollar positions ahead of the weekend.<br><br>Some selling from exporters who had missed Thursday's deadline to convert half of their foreign currency holdings into rupees was also cited by traders.<br><br>A chief forex dealer at a state-run bank said the RBI had admonished exporters they faced penalties if they did not meet the central bank's mandate issued earlier this month.<br><br><strong>RBI Intervening Frequently In Rupee Forwards</strong><br>RBI has been seen intervening in the rupee forward markets, alongside its defence of the spot rupee, possibly to replenish its FX reserves and to replace domestic rupee liquidity, traders said.<br><br>That intervention in forwards, coupled with the heavy demand for short-term hedging by importers and foreign investors, has led to a steep inversion of the dollar/rupee forward curves, both offshore and onshore.<br><br>The spread between the implied yields on the 1-month and the 1-year rupee onshore forwards has widened from a negative 69 basis points in mid-May to as high as 110 basis points.<br><br>The spread in the offshore implied forward curve between the one-month and one-year non-deliverable forwards is now a negative 430 basis points, having widened from a negative 110 in mid-May.<br><br>"Spot dollar demand and near-end demand for hedging keeps it elevated while far-ends been depressed due to RBI intervention," one NDF trader said.<br><br>The "lack of natural hedgers other than FIIs" was also keeping forwards at the longer end depressed, he said, referring to foreign institutional investors.<br><br>Traders said the Reserve Bank of India had been receiving in the 6-month to ten-month dollar-rupee swaps. The latest data from the RBI shows the outstanding net forward dollar sales as at end of March was $3.2 billion, though detail on the tenors is unavailable.<br><br>That receiving in forwards also helps the RBI augment its intervention firepower.<br><br>It has been selling dollars aggressively in the spot market to rein in the falling rupee, but the swaps help it defer the impact of that selling on FX reserves to a later date. Reserves stood at $291.80 billion as of April.<br><br>The RBI has also been easing rupee liquidity conditions via bond purchases, both through open market operations and suspected bond purchases in the secondary markets.<br><br>"Intervention is happening at the longer end of the forwards curve. The impact of intervention is the same across tenors but is seen more on the longer end on annualised basis," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.<br><br>The spot rupee was last trading at 55.38/39 per dollar, weaker than its Thursday's close of 55.65/66. It had hit a life-low of 56.40 on Thursday.<br><br>(Agencies)</p>