Rupee strengthens, call rates wind up higher

RECAP

The rupee ended firmer against the dollar on bunched up inflows after the weekend clubbed with muted demand.

Further, sustained weakness in dollar overseas and robust economic data also supported the sentiment on the rupee last week.

The support for rupee may continue this week as the currency is nearly three per cent undervalued on a trade-weighted basis.

Forward premiums softened as banks sold forward dollars in reaction to a rise in the spot rupee and the cash dollar shortage.

However, the week also saw the rupee ending weaker against the dollar backed by demand from banks possibly acting on behalf of the Reserve Bank of India to swipe the rupee's morning gains.

However, dollar sales from exporters aided the currency's recovery. The sentiment continued to be in favour of the local currency due to the greenback's steady descent against other major global currencies.

Forward premiums edged up slightly due to improvements in cash dollar supplies. The dollar was traded at a lower discount to the spot rate, prompting banks to reverse forward dollar sold positions.

Call rates ended slightly higher at 4.25-4.5 per cent on last Tuesday compared with the previous close of 4.2-4.4 per cent on the back of ample liquidity in the system.

Despite the comfortable liquidity situation, Rs 30,000-50,000 crore worth subscriptions were witnessed at the one-day repo auction of the Reserve Bank of India (RBI) last week.

Even after the open market operations and the auction, the RBI received subscriptions to the tune of Rs 29,000 crore.

Government bond yields ended weaker on Tuesday as the yield at the auction of the 11-year bond was in expected lines. The weighted average yield was lower than the cut-off yield which indicates bullishness in the market.

However, RBI deputy governor Rakesh Mohan's comment that food prices had not declined in line with his expectations hit the market sentiment, traders said.

The 10-year benchmark 7.37 per cent paper maturing in 2014 was quoted around 5.12 per cent, up from the previous close of 5.11 per cent.

Money market dealers interpreted this trend as an indication of a higher-than-desired inflation level which leaves little room for a further cut in interest rates. Following this, gilt prices ruled range-bound during the day, dealers said.

On the other hand, RBI governor Y V Reddy said the country's inflation outlook remained by and large benign in spite of a larger-than-expect price rise in the last two months.

Subsequent sessions witnessed government bond yields edging up as investors opted to book profits when prices were high in the morning session amid an uncertain outlook for interest rates, dealers said.

The yield on the benchmark 10-year bond rose to 5.12 per cent. However, traders said the Centre's decision to slash excise and customs duties on a wide-range of manufactured goods and imports may marginally lower inflation rate.

Call rates ended higher at 5-6 per cent on Friday compared with the previous close of 4.3-4.5 per cent amid a rise in demand due to mismatches encountered by market dealers for reserve requirements.

The RBI, at the one-day repo auction held on Friday, accepted all the 50 bids received for Rs 29,640 crore.

Yields on government bonds inched up after data showed a higher-than-expected rise in wholesale prices, dealers said.