Robust run for rupee, gilts static, bonds flaccid

RECAP

The gilts market saw rangebound trading last week despite banks being flush with liquidity. The market has become cautious as the outlook on interest rate has turned neutral.

The rupee strengthened on account of foreign institutional investors stepping up investments in the stock market.

The benchmark 7.27 per cent 2013 gilt hovered in the 5.16-5.21 per cent yield band last week.

On Friday, the market witnessed a small rally as the inflation rate, at 5.25 per cent in the year through November 29, 2003, turned out to be lower than what the market expected. The 8.07 per cent 2017 gilt, in fact, gained by almost 70 paise on positive inflation data.

Trading in the corporate bond was, however, lacklustre. The spread between the best rated five-year corporate bond and the corresponding maturity five-year gilt continues to be at 80-90 basis points. This spread was at 50-60 basis points about a month-and-a half ago.

The Reserve Bank of India, on Wednesday, gave banks a one-year breather to regularise their investments in debt schemes of mutual funds.

The RBI said investments by banks in such schemes will continue to be outside the purview of non-statutory liquidity ratio investments till December 2004.

The rupee gained ground against the dollar during the week on the back of steady foreign fund inflows, but a late round of dollar short-covering by banks, possibly on behalf of the central bank, arrested a ten-session strong rally.

The rupee finished the week at 45.5450/5550 per dollar, higher from the previous Friday's finish of 45.60/61.

It hit three-week peaks of 45.5150/5250 on Wednesday in mostly quiet and range-bound trade at the interbank foreign exchange market.

Barring a three paise downward correction in the last two sessions, the rupee has appreciated by around 44 paise since November 27, driven-up by robust trade and capital inflows and a lingering weak dollar against major global currencies, particularly the euro.

Foreign institutional investors investments in the stock market coupled with exporter remittances gave the rupee firm underlying support.

However, last minute rush to cover short-dollar positions by state-run banks, possibly on behalf of the central bank, put capped the rupee's rise.

Foreign institutional investors have pumped in over Rs 612 crore ($ 134 mln) on December 10 in equity, one of the highest ever investment on a single day.

Meanwhile, India's foreign exchange reserves jumped by over $ one billion for the second time within a month and crossed $97 billion.

During the week ended December 5, the foreign reserves jumped by $1.449 billion and stood at $ 97.520 billion, according to the Reserve Bank of India's weekly statistical supplement.

During the previous week ended November 21, forex reserves had increased by $ 1.710 billion.

The robust growth in reserves was mainly on account of foreign currency assets rising by $1.331 billion and gold reserves increasing by $118 million owing to revaluation.

As of December 5, foreign currency assets stood at $ 93.479 billion and gold reserves at $4.038 billion. Special drawing rights remained unchanged at $3 million respectively.

Reserve tranche position with the international monetary fund increased by $5 million at $1.224 billion.

The RTP may change, from time to time, owing to India's transactions under financial transaction plan with the IMF.