Political uncertainty roils markets

RECAP

Political uncertainty took a toll on the financial markets last week. The foreign exchange and bond markets remained rangebound but witnessed heavy intra-session volatilities.

The week kicked off like Apocalypse Now, when the Bombay Stock Exchange Sensex saw its largest ever intra-day fall of 842 points.

In order to avoid payment and liquidity problems, the Reserve Bank of India intervened. The apex bank is said to have sold dollars worth $350-400 million as part of indirect intervention.

As a result, the spot rupee, which opened at 45.48/53 per dollar and dipped to 46.00 recovered to 45.50/53.

The RBI said it was closely monitoring the developments in the financial markets and stands ready to provide liquidity to the banks for meeting all their payment obligations including intra-day requirements.

The RBI said it will continue to sell dollars through agent banks in order to augment supply or intervene directly to meet any demand supply imbalances.

Forward dollars, which were reeling at a discount for a long time, have started approaching premium as interbank positions were cleaned up by cutting losses.

Bankers are of the view that forward dollars will come back to premium as outlook on spot rupee is bearish which will induce the importers to take cover for their payment obligations.

The government securities market, on the other hand, witnessed a fall with yield on the ten-year benchmark 7.37 per cent 2014 touching 5.28 per cent as against a close of 5.18 per cent last week.

The underlying sentiment was bearish as market players were of the view that liquidity in the medium term might come under pressure owing to heavy selling by foreign institutional investors.

During the week, while the foreign exchange market was volatile due to demand from the interbank market on one hand and exporters selling dollars on the other, the bond market ended rangebound with yields firming up to 5.13 per cent from week's opening of 5.09/10 per cent.

The dollar rose 50 paise against the rupee early in the week touching, 45.01 "" a five-week high "" in flighty circumstances.

Importers who resume action when the dollar gains, rushed to cover their exchange risk in the forward market, while exporters who are on the other side cancelled forward contracts and booked afresh.

The forward rates continue being quoted at a discount owing to cash dollar shortage.

Dealers said dollar supplies have dried up even as the RBI has become an aggressive buyer whenever there is a sign of the rupee's appreciation. This has strengthened the dollar and led to cash dollar shortage.

Overall market ended rangebound towards the end of the week.

Despite inflation being pegged at 4.26 per cent and outstanding liquidity in the system at Rs 70,000 crore, bond dealers continue to be a concerned lot.