Indian rupee,bonds fall as Street fears RBI will reduce liquid diet

Gloom over market as US Fed taper fears loom over positive trade data,hits Indian rupee.

Written by Fe Bureau | Mumbai | Published: November 12, 2013 12:43:40 am

Despite encouraging trade data for October,the Indian rupee fell through the 63-mark on Monday to end near a two-month low while worries about an earlier-than expected tapering of the US Federal Reserve’s stimulus measures coupled with fears of an overhang of gilts in the local market pushed bond yields past the 9% mark.

The yield on the 10-year benchmark 7.16%,2023 bond touched an intra-day high of 9.14%,before easing to 8.95% at close; these levels have not been seen since mid-August when the Reserve Bank of India (RBI) had abruptly tightened liquidity to stem the rupee’s fall. On August 17,the 10-year bond yield had closed at 9.24%.

A weaker currency and higher interest rates in the bond market pushed broader equity markets and bank stocks lower. Extending losses for the fifth consecutive session,benchmark Indian indices declined nearly 1% on Monday,led by sharp losses in shares of banks and rate-sensitive companies. In a volatile session,the Sensex shed 175.19 points to end at 20,490.96 — a three-week low — while the Nifty gave up 1.01% to settle at 6078.80.

While a part of the jump in yields was in line with global yields moving higher — the yield on the US treasury hit 2.75% — much of it was due to apprehension the RBI would not infuse further liquidity via open market operations (OMO). “About 7-8 basis points of today’s move in the yield can be attributed to the better-than-expected US data but a large part is due to the lack of OMOs,” Jayesh Mehta,MD & country treasurer,Bank of America,said. Yields could rise to 9.20% before stabilising,added IDBI Bank head of treasury NS Venkatesh.

Meanwhile,better jobs data from the US sent the dollar soaring against most global currencies; the dollar index was ruling at 81.157 against 81.14 in mid-September. Expectations that the US Fed’s taper of its $85 billion monthly bond purchases could begin early next year pushed up treasury yields to 2.75.

Despite trade deficit for October halving to $10.5 billion year-on-year,currency markets refused to be cheered.

The rupee took a knock losing 1.22% to end near a two-month low of 63.24 per dollar. Urjit Patel,deputy governor,RBI,noted in an interview with a television network that while the deficit was higher than that in September,the fact that it was 50% of that in October last year ‘bodes very well for the trade deficit and the current account deficit and is the most important fundamental factor for the rupee’.

Nevertheless,worries that slowing dollar inflows coupled with higher dollar demand in the market from oil companies pushed the rupee lower on Monday.

Hitendra Dave,head global markets,HSBC said the rupee’s weakness can be attributed to weak sentiment even though the monthly outgo due to current account deficit could have come down sharply. “Some dollar buying by oil companies has been seen and the market thinks slowly these clients will come back fully to the foreign exchange market for their needs,” said a forex dealer.

The Bank Nifty declined 1.5% on talk that the RBI will not be in a position to ease liquidity given the renewed volatility on the currency front.“To stabilise the market,you have to take steps to reduce supply,increase demand or infuse liquidity. Since they have the term repos and other facilities in place,the probability of that increase in demand has become less,” said Dave suggesting that the RBI would not buy government bonds via open market operations.

In addition to the daily repo tender and the Marginal Standing Facility(MSF) the RBI recently introduced term repo facilities for 7-day and 14-day periods. On Friday,banks had borrowed an outstanding Rs 38,505 crore through the term repo window while borrowings from the one-day repo and the MSF tender stood at rs 40,613 crore and rs 19,400 crore respectively.

In the past,RBI has bought gilts regularly to reduce the liquidity deficit in the market as the OMO has been an effective tool to not only shore up liquidity but also prevent a sharp rise in yields.The RBI bought rs 16,675 crore worth of bonds through OMOs during April-September. In 2012-13,the central bank had bought nearly rs 1.53 lakh crore through OMOs.“The second half of any financial year typically sees tight liquidity because of a pick up in credit demand so OMOs are needed to accommodate the government’s borrowing ,” observed a primary dealer.

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