 "Rupee closes at 64.11 a dollar on Wed")
Government bonds were headed for their biggest gain in at least 15 years, while the rupee remained under pressure after the Reserve Bank of India (RBI) said it will buy bonds to ease a cash crunch, and relaxed bond holding rules for lenders.
The rupee hits fresh all-time low, trading around 64.52 per dollar as heavy dollar buying from large state-run banks along with demand from custodian banks hurt the local currency on Wednesday.
The partially convertible rupee was trading around 64.45 per dollar, after hitting a record low of 64.52.
Yesterday, the rupee had touched an all-time low in intra-day trade by breaching the Rs 64 per dollar mark. But dollar sale by state-run banks acting on behalf of RBI helped the rupee to recover.
Deutsche Bank in a note on Wednesday said that the rupee may slide to 70 to the dollar in a month or so, although some revival is expected by the end of the year.
Meanwhile, yield on the benchmark 10-year bond fell as much as 69 basis points to 8.21% as its price rose. The benchmark 10-year bond yield was at 8.34%, down 56 basis points on the day.
Yesterday, the yield had surged to 9.48% during intra-day trades, an over five year high.
“The fall in yields will help to mitigate treasury losses significantly. The RBI measures will also helped to create fresh demand for government bonds,” said the head of treasury of a private sector bank.
RBI will auction government bonds for a notified amount of Rs 15,000 crore as well as conduct Open Market Operations (OMO) purchase of government bonds up to Rs 8,000 crore on Friday.
“This will ensure that there will not be any devolvement in the government bond auction,” said the head of treasury of a large public sector bank.
In the government bond auction held last week for a notified amount of Rs 16,000 crore, there was partial devolvement on primary dealer to the tune of Rs 1,444 crore.
Government bond dealers do not see the yield on the 10-year benchmark bond touching 9% in the near-term.
"We are relieved that the RBI has diluted the July 15, 2013 tightening measures. This supports our standing call that the road to Indian rupee stability lies through recouping foreign exchange reserves rather than rate hikes. RBI has resumed OMO purchases of Rs 8,000 crore of gilts to reverse the spike in yields sparked by OMO sales announced on July 15... We continue to believe that the Indian rupee will not settle down till RBI issues NRI bonds or sovereign bonds," Indranil Sen Gupta, India economist at Bank of America Merrill Lynch, said in a note to clients.
The RBI also relaxed rules on mandatory bond holdings for banks, known as the statutory liquidity ratio, which will help protect lenders from large mark-to-market losses. While banks had previously been asked to cut their hold-to-maturity bond holdings gradually to 23% of deposits, the RBI on Tuesday allowed banks to retain them at 24.5% of deposits.
"RBI's actions have provided some relief and are sentimentally positive. We expect liquidity to be better in the near-term. RBI has also recognised that it should address issues pertaining to mark-to-market losses. But we will continue to remain cautious on banking stocks till we get a clear picture on how the liquidity situation will be in the medium to long term. At this point of time we are not upgrading our ratings on any of our banking stocks," a banking analyst with a domestic brokerage said.
Interest rate swaps were also sharply down. The 5-year OIS was down 49 basis points at 8.46%, while the 1-year was down 44 bps at 9.45%.