Rupee advances as stock gains expected to fuel capital inflows

Rupee strengthened on optimism a rally in local stocks will encourage overseas funds to step up purchases of local assets.

The rupee ended two days of losses as the benchmark Bombay Stock Exchange Sensitive Sensex, climbed to a seven- month high. The index has rebounded 49 per cent since closing at a three-year low on March 9. Overseas investors bought $943.6 million more Indian equities than they sold this month, compared with $1.6 billion in net purchases in April, according to data provided by the Securities & Exchange Board of India.

“Investors are appearing to be more optimistic, which is why they are increasing their stakes in local markets,” said KV Mallik, treasurer at state-owned UCO Bank in Kolkata. “The rupee is drawing benefits from that confidence.”

The rupee rose 0.4 per cent to 49.315 per dollar at the 5 pm close, according to data compiled by Bloomberg. The currency touched 49.06 yesterday, the strongest level since February 17.

The rupee fell earlier today on speculation banks and companies sold the currency after it strengthened toward so- called resistance at 49 per dollar, said Viswanathan Kumar at State Bank of Travancore.

“Technical factors have bolstered dollar demand,” said Kumar, chief foreign-exchange trader at the bank in Mumbai.

Resistance is a level where sell orders may be clustered.

Offshore contracts show traders predict the rupee will weaken to 49.47 to the dollar in a month, compared with expectations for a rate of 49.58 yesterday. Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars rather than the local currency.

Bonds drop as investors sell before debt sale
The government bonds fell on speculation some investors sold part of their holdings to free up cash for purchases at auctions later this week.

Benchmark 10-year yields climbed to the highest level in almost a month before the government’s scheduled sale of Rs 120 billion ($2.4 billion) of debt on May 14, the second this month.

“Investors can’t hold positions for long because of the huge supply that is planned by the government” said KV Mallik, treasurer at state-owned UCO Bank in Kolkata. “We can’t avoid the persistent pressure on yields to rise.”

The yield on the 6.05 per cent note due 2019 increased seven basis points to 6.41 per cent at the close, according to the central bank’s trading system. The price slid 0.49, or 49 paise per 100-rupee face amount, to 97.40. A basis point is 0.01 percentage point.

Bonds rose earlier after a government report today showed factory output in March contracted by the most in 16 years.

The 2019 bond yield may reach 6.2 per cent in coming days, Singh said.

The Reserve Bank of India has slashed interest rates six times since the start of October, most recently lowering the benchmark reverse-repurchase rate by a quarter of a percentage point to 3.25 per cent on April 21. Borrowing costs should be cut “massively” to help revive the economy, Yashwant Sinha, a former finance minister, said yesterday in New Delhi.

Sinha is a lawmaker in India’s biggest opposition party, which is seeking to regain power in elections this month.

The cost of five-year swaps, or derivative contracts used to guard against rate fluctuations, climbed. The rate, a fixed payment made to receive floating rates, rose to 5.78 per cent from 5.70 per cent yesterday.

Call rates near reverse repo
Indian overnight cash rates stayed near the reverse repo rate of 3.25 per cent on Tuesday on lower demand from banks sitting on piles of cash and other assets.

The overnight money closed at 3.20/30 per cent, unchanged from its previous close.

Traders said cash volume is relatively low as many banks possessing government securities above the stipulated limits are pledging them in the Collateralised Borrowing and Lending Obligation (CBLO) and borrowing at lower rates.

"Many banks are SLR surplus and using it to borrow from the CBLO at lower rates, resulting in comparatively low call volume," said Phani, a dealer at State Bank of Hyderabad, who uses only his first name.

Statutory Liquidity Ratio (SLR) is the proportion of deposits banks have to hold in approved government securities.

The weighted average rate in the call money market was 3.26 percent, while in collateralised borrowing and lending obligation (CBLO) it was 2.38 percent, according to the Clearing Corp of India (CCIL).

Volume in the call money market was 85.18 billion rupees and in CBLO it was 578.06 billion rupees, CCIL data showed.