High dollar demand from oil importers and fading hopes that intervention by the central bank would help arrest rupee depreciation pushed the Indian currency to end at the day's lowest levels. After appreciating to 50.60 levels in early trade, the rupee retraced its downward trajectory and lost 18 paise to close at 50.91 against the greenback on Thursday.
According to market participants, the Reserve Bank of India (RBI) intervened in the forwards segment at around 50-90 levels on Thursday. However, comments from a senior RBI official that the central bank had limited reserves to fix an exchange rate weighed on the rupee. RBI Deputy Governor Subir Gokarn said the central bank would be careful about using foreign exchange reserves excessively to protect the rupee's depreciation. He said intervention would only be to curb volatility, not to set an exchange rate.
“Dollar sale from information technology companies in early trade was soaked up by the oil importing companies during rest of the trade,” said a forex dealer with a private sector bank. Foreign fund outflows from weak performances by domestic equity markets also contributed to the rupee downfall. According to the Bombay Stock Exchange, there were net fund outflows of Rs 198 crore, as both the Sensex and the Nifty fell by around 1.9 per cent on Thursday.
Mounting pressure on the euro and high dollar demand amid global risk aversion resulted in the rupee depreciating 15.5 per cent since August. Data showed RBI sold dollars worth $845 million in September.
BONDS YIELDS SLIP Government bond prices surged on Thursday after the Reserve Bank of India announced it would buy bonds worth Rs 10,000 crore late Wednesday night. Bond price rise was also supported by the government’s announcement to hike the foreign investment limit in government bonds, dealers said.
The yields on the 10-year benchmark government bond eased seven basis points to close at 8.81 per cent. Bond yields fell by 10-12 basis points across various securities.
The central bank, however, did not mention the papers it would buy. Most market participants expect the illiquid benchmark 7.80 per cent, 2021 bond to be among the papers the central bank might consider buying. The bond settled at Rs 93.40, or 8.84 yield, against the previous close of Rs 92.62. The government’s approval to raise the investment limit for foreign institutional investors in local debt also prompted traders to build positions.
Market participants had been hoping for these announcements since last week, as weak demand at auctions hit sentiment. “Now that the central bank will take care of oversupply, banks will not hesitate to buy in the auctions,” said Anoop Verma, associate vice-president, Development Credit Bank.
Liquidity continued to stay tight with banks borrowing close to Rs 92,000 crore from the liquidity adjustment facility of RBI on Thursday which is almost double than the central bank comfort zone of Rs 50,000 crore. “We expect after this open market operation (OMO), there would be a series of OMOs. If that does not come through, the market would be disappointed,” a senior trader with a foreign bank said. CALL RATE RECOVERS
The overnight call money rate on Thursday closed higher at 8.60 per cent from yesterday's close of 8.25.
