The rupee fell to a six-week low on worries over faltering global recovery and buying of US dollar by banks to meet demand from importers.
Dealers said weak economic data from US raised concern over prospects of global recovery. It also raised apprehension that investors might cut holding in emerging assets.
The currency declined for a third day after Union Commerce Secretary Rahul Khullar said yesterday India’s exports rose at the slowest pace in five months during June.
Rupee was at 47.36 per US dollar at closing hours (5 pm), taking this week’s losses to 1.25 per cent. It fell as low as 47.39 earlier, the weakest level since June 7. It has slid 1.9 per cent so far this month.
According to dealers, the rupee also stayed weak as three large state-owned banks bought dollars to meet defence-related demands.
Economic woes have now spread from the euro zone to the US, and the risk of a double-dip recession is gaining credence to send shock waves in the emerging markets. The rupee was expected to stay under pressure, said a head of treasury with new private sector bank.
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Offshore forward contracts indicated the rupee would trade at 47.96 to the dollar in three months, compared with expectations for a rate of 47.68 yesterday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
10- year bond yields at 1-month high
The benchmark 10-year bonds declined, pushing yields to their highest level in more than a month, on concern reduced cash at banks will push overnight rates higher, curbing demand for debt.
Yields rose the most in a week on speculation the central bank will raise interest rates for a second time this month after the nation’s top statistician said inflation will accelerate in July due to higher fuel prices. The interbank call money rate rose as much as 5.70 per cent on Tuesday, above the 5.5 per cent rate at which the Reserve Bank of India lends to banks, indicating tight cash conditions.
“Expectations that liquidity will improve in early July have been belied and the cost of funding has gone up,” said S. Srikumar, a fixed-income trader at state-owned Corporation Bank in Mumbai. “Inflation is also causing concern to investors.”
The yield on the 7.80 per cent note due in May 2020 rose four basis points, or 0.04 percentage point, to 7.67 per cent at close in Mumbai, according to the central bank’s trading system. The price fell 0.30, or 30 paise per 100 rupee face amount, to 100.90.
Banks borrowed an average Rs 5,004 crore ($10.6 billion) a day from the central bank through its repurchase- auction window from June 1 until yesterday. In May, the Reserve Bank of India drained a daily average of Rs 32,800 crore from lenders.
Wholesale prices rose 10.55 per cent in June, a fifth month in which gains exceeded 10 per cent. A decision by the government on June 25 to scrap subsidies on gasoline and increase diesel prices may add 1 percentage point to inflation, according to estimates by the central bank.
“The inflation number in July will be higher than in June, in large measure because of what has happened to fuel prices,” T C A Anant, the government’s top statistician said on July 16. The central bank’s next policy meeting is scheduled for July 27.
Finance Minister Pranab Mukherjee said on Tuesday inflation was a matter of concern and it was no longer confined to food items alone. The inflation rate may slow to between 5 per cent and 6 per cent by the end of March, helped by good monsoon rainfall, Cabinet Secreatary K M Chandrasekhar said on Tuesday.
Call rate ends steady as demand for funds strong
The call money rate ended flat on Tuesday as banks’ demand for funds continued to remain strong due to the liquidity squeeze, dealers said.
The one-day call rate ended at 5.50-5.75 per cent, flat compared with Monday’s close for one-day loans.
“Call rate has remained steady because liquidity is tight. However, the call rate is unlikely to inch up more on the view that liquidity will come back in the system gradually in the next few weeks,” said a dealer with a private bank.
Liquidity in the banking system has become tight since June due to payments by companies towards broadband, 3G spectrum fee, and corporate advance tax.
Squeeze in liquidity was evident from the first repo tender on Tuesday. Banks borrowed Rs 45,625 crore on Tuesday at repo tender. Second liquidity adjustment facility results are yet awaited.
CBLOs were dealt at a weighted average rate of 5.49 per cent, flat compared with Monday.