Rupee rule rangebound, forward premiums look up

RECAP

Call rates hovered around 4.25-4.50 per cent in the interbank money market last week on the back of ample liquidity amid thin demand.

In the beginning of the week prices of select bonds at the medium-to-long end fell by 8-20 paise on moderate selling in the absence of market-moving factors, dealers said.

Central government bond yields moved up after the Reserve Bank of India (RBI) set a high cut-off yield at the sale of the 91-day treasury bill which was higher than the market rate.

While call rates remained in the 4.25-4.50 per cent range, government security prices moved in a range of 10-20 paise.

Government paper yields firmed up for most part of the week and the market crashed following the announcement of the 6.12 per cent inflation rate as against the expected 6.02 per cent rate.

Before this, the sentiment was weak as a follow-up of the Federal Reserve meeting where the market feels that strong signs emerged for a possible upward revision in the Fed rates.

The selling spree started in long-term papers and spilled over to medium-term papers as well. During the beginning of the day, long-term prices fell by 40 paise, while medium-term papers witnessed a fall of 20 paise.

However, on expectations of a lower inflation on Friday, buying demand led to a recovery and long-term prices went up.

Another factor that had led to the fall is the cautious approach by the Fed Reserve. Though the Fed mentioned that current interest rates will be maintained, it didn't mention "the considerable period".

Some dealers are of the view that in expectation of new inflation rates expected to arrive on last Friday, players preferred to liquidate existing positions so as to make room for fresh positions.

However, they added that even if the inflation rate is likely to go down with the base effect, prices of primary articles and oil remain firm.

In fact, the cautious outlook on inflation with an open upward bias expressed in the currency and finance report released by the RBI added to the concerns.

This led dealers to perceive that except for the base effect, as of now there is no other reason for the inflation rate to come down.

They added that in all likelihood, the inflation rate will go up during the end of the year. It is also possible that by the end of the year, the Fed might revise its base rates upwards.

Throughout the week, the spot rupee ruled around 45.35/36 against the dollar and edged up to 45.30 in the absence of central bank intervention and global weakness in dollars.

The rupee has been buoyed on upbeat sentiment on the economy and dollar's persistent weakness across the globe.

However, dealers remained cautious feeling that even though steady portfolio inflows are likely to give a fillip to the rupee, its gains are likely to be limited on expectation of RBI intervention.

Forward premiums are likely to march further north due to RBI intervention to stem up the rupee and the exporters cancelling earlier deals to book profit and receive higher premiums. Despite robust inflows and upbeat economic outlook, the rupee is likely to be rangebound.

Towards the end of the week,. the rupee ended firmer on dollar inflows from foreign funds and exporter trade remittances.

Forwards rose sharply on sustained intervention from nationalised banks across all maturities. As cash dollars were in good supply, banks continued to reverse forward dollar sold positions.