India’s benchmark bonds rose for the first time in three days on speculation that yields at the highest level in 13 months attracted some investors.
The yield on the 6.9 per cent note due July 2019 declined one basis point to 7.47 per cent at the 5:30 pm close in Mumbai, according to the central bank’s trading system. The price rose 0.06 per cent, or 6 paise per Rs 100 face amount, to Rs 96.16. A basis point is 0.01 percentage point.
Bonds fell earlier today after central bank Deputy Governor Subir Gokarn said over the weekend that policymakers couldn’t ignore the link between higher food costs and inflation.
“It appears imminent that monetary tightening will happen much sooner than investors had earlier estimated,” said Sanjay Arya, treasurer at state-owned Bank of Maharashtra in Mumbai. “Yields have to price in the fact that for inflation control, authorities will take steps in the near term that won’t be beneficial for bonds.”
Rupee at one-week low
The rupee fell the most in more than two weeks as better-than forecast US jobs data fuelled speculation the Federal Reserve will raise interest rates, leading currencies in most of Asia’s developing economies lower.
The rupee dropped to its lowest closing level in a week as the benchmark stock index fell for a second day on speculation overseas investors are trimming holdings of the nation’s assets.
The rupee fell 0.6 per cent to 46.57 a dollar at 5 pm in Mumbai, its weakest close since November 27, according to data compiled by Bloomberg. It closed at 46.2975 on December 4.
The Sensex declined 118.40 points, or 0.7 per cent, to 16,983.14.
A US Labor Department report on December 4 showed the jobless rate in the world’s largest economy unexpectedly declined last month. The Dollar Index, which tracks the greenback against the currencies of six major trading partners, on December 4 posted its biggest gain since President Barack Obama took office in January.
The fall in shares added to the adverse sentiment for the rupee, said Roy Paul, assistant manager of treasury at Federal Bank in Mumbai.
“Shares were not going great guns,” Paul said. “With dollar gaining overseas, this compounded the problem for the rupee.”
US employers eliminated 11,000 jobs in November, the fewest since the recession began, the Labor Department reported on December 4. The median forecast of 82 economists in a Bloomberg survey was for a reduction of 125,000 jobs. The jobless rate slipped to 10 per cent from 10.2 per cent.
US target rate
Federal-funds futures contracts on the Chicago Board of Trade show a 18 per cent probability the Fed will increase the target rate for overnight lending between banks to at least 0.5 per cent by March, up from 11 per cent odds a week ago. The benchmark is currently zero to 0.25 per cent.
Offshore contracts indicated the rupee would trade at 46.59 in a month, compared with expectations for a rate of 46.24 at the end of last week. Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars rather than the local currency.
CP-CD: Banks issue CDs on expectation rates may rise
Banks issue certificates of deposit (CDs) today on expectation the rates could rise in the coming weeks, dealers said.
“Many banks’ CDs are also maturing and so most of them prefer to refinance their existing CDs now itself,” said a dealer at a state-owned bank.
The rates on short-term instruments have risen 20 basis points since last week on views that the Reserve Bank of India could hike its Cash Reserve Ratio sooner than expected.
Many top RBI officials last week have been commenting that monetary actions may be needed if food prices remain high.
Dealers are of the view that RBI could hike its CRR in December itself to suck out the excess liquidity in the banking system.
Banks are still parking around Rs 95,000 crore to Rs 1 lakh crore in RBI’s daily reverse repo window.
Today, certificates of deposit (CDs) worth around Rs 2,300 crore were placed in the primary market.
Three-month CDs were quoted at 3.35-3.60 per cent, compared with 3.25-3.50 per cent on Friday.
Three-month commercial papers (CPs) were quoted at 3.70-3.90 per cent, compared with 3.60-3.80 per cent on Friday.
