Rupee edges down, forex pile-up continues

RECAP

Yields on medium and long-tenor gilts eased by about five to 10 basis points last week as mutual funds and banks increased their positions in anticipation of pension funds and foreign banks making fresh purchases in January.

Prices of long-dated gilts (securities having a residual maturity of 15 years and above) increased by about one rupee last week.

Bonds at the long-end of the yield curve gained on account of front-running by banks and mutual funds, who expect provident funds to deploy a part of the Rs 8,000 crore received by way of interest payments from the special deposit scheme in January.

Though the wholesale price inflation has increased to 5.57 per cent in the week ended December 13, mainly driven up by an increase in edible oilseed prices and greater demand for manufactured products, as against 5.38 percent in the week ended December 6, the market has rallied as participants feel that it has peaked and will start declining in January.

Inflation has risen for the fifth consecutive week. Yields have also eased on the back of comments from the Reserve Bank of India governor Y V Reddy that he saw no change in the inflation outlook despite commodity prices hardening in a rebounding economy.

Yield on the benchmark 7.27 per cent 2013 gilt eased by about five basis points last week. It finished the week at an yield of 5.10 per cent.

The rupee ended last Friday at its three-week closing low of 45.58/59 per dollar. It depreciated by 0.16 per cent during the week.

Although, persistent foreign fund inflows and export remittances continued to give the rupee firm underlying support, renewed dollar demand from corporates and importers for month-end and year-end considerations exerted moderate pressure on the rupee.

Despite the rupee's downward correction, outlook for the Indian unit remains upbeat on the back of rising foreign fund inflows and export remittances. The FII inflows into the stock and debt market have been robust in 2003.

This is underscored by the fact their net investments, at $ 6.38 billion, was the highest made in a single year since foreign funds were allowed to invest a decade ago.

Thanks to the buoyant stock market foreign fund inflows are expected to gather pace in the New Year. The signal 30-issue Bombay Sensitive Index (Sensex) has rallied by 69 per cent in 2003 on the back of foreign insitutional investors pumping funds into the stock market.

Though the rupee lost seven paise against the US currency last week, it has appreciated more than 5.2 per cent against the dollar in 2003. It has been buoyed by FII inflows, exporter earnings, and expatriate remittances.

Last week near forwards eased in thin volumes but expectations that state-run banks will transact sell-buy swaps on behalf of the central bank to push up premiums weighed on sentiment.

Premiums have risen since the start of the week on sell-buy swaps by state-run banks. The six months annualised forward premium ended Friday at 0.15 per cent as against previous Friday's level of 0.05 per cent.

Meanwhile, India's foreign exchange reserves jumped by $1.090 billion to cross the $100 billion mark during the week ending December 19. The reserves as of this date stood at $100.049 billion.

The growth in reserves is solely on account of foreign currency assets burgeoning $1.090 billion during the reporting week. The assets stood at $96.008 billion, according to the Reserve Bank of India's weekly statistical supplement.

The central bank said gold reserves and special drawing rights remained static at $4.038 billion and $3 million, respectively.

The reserve tranche position with the International Monetary Fund rose by $8 million to $1.241 billion.