Crude, inflation worries hit gilts, rupee

RECAP

Rising crude oil prices and expectations of a higher inflation rate affected the government securities market last week.

The yield on the 10-year benchmark 7.37 per cent 2014 gilt rose to close at 6.40 per cent on Friday as against Monday's close of 6.12 per cent.

"A high inflation rate of 7.8 per cent, lack of a view on interest rates and no major buying pressure from banks resulted in a crash in gilt yields in the range of 50 paise to a rupee last week," said a dealer.

The benchmark paper closed at almost a five-week high of 6.40 per cent on Friday as against 6.25 per cent on Thursday.

The yield on this paper had surged to close at 6.65 per cent on August 11 owing to a bearish interest rate scenario, rising oil prices and high inflation rate.

The prices of long-term gilts fell by almost one rupee last week, while the short and medium term papers dipped by almost 70 paise.

According to an estimate, the banking sector is set to witness a market erosion of around Rs 4,500-4,800 crore in the value of government securities held for trading for the quarter ended September 30.

This erosion in value will come up during the valuation of their trading portfolio during the end of the second quarter.

The valuation is based on the market price of government securities as on September 29. The yield on the 10-year benchmark paper was 6.22 per cent on Wednesday, 40 basis points higher than the closing yield on June 30 (5.82 per cent).

Prices of gilts on September 29 had fallen by almost Re 1 with the 10-year gilt yield touching 6.25 per cent. The Rs 25,500 crore third-quarter mobilisation target set by the government under the market stabilisation scheme was less than the estimated amount as the list excludes dated securities.

Rising oil prices left banks rushing for dollars to meet month-end demand, while the market was struck short of dollar supply which pushed the rupee to a low of 46.11/12 on Friday.

The currency recovered later to close at 45.89/90 to a dollar.

During the week, the spot rupee which had been ruling below 46 for almost a fortnight and even has reached a high of 45.80, breached the 46-level.

At present crude oil prices (NYMEX) is trading around $50.04 per barrel. Forex dealers added that besides customer and interbank demand for dollars, the week sentiment is adding to the bearishness in the market.

This again is being fuelled by rising interest rate scenario in the Indian market as well as the spiralling oil prices.

Dealers said the importer demand piled up at the end of Friday when importers felt that the spot rupee will lose more subsequently on low dollar supplies.

The rush to cover future payments was coupled with deals among banks to cut losses arising from previous contracts.

The rise in domestic share indices by over 1.5 per cent also boosted sentiment in the foreign exchange market, raising hopes of rise in investments from foreign investors, dealers said. In September, such funds invested $601 million, slightly lower from $612 million in August.

Premiums on dollar forwards had opened 10-12 basis points lower as banks sold forward dollars following the spot rupee's rise to 45.88-45.89 rupees per $1.