Rupee gains in volatile trade, gilt yields vault up

RECAP

The foreign exchange and government securities markets remained volatile throughout the week.

The spot rupee moved both ways by 10-12 paise against the US dollar almost every day. It opened the week at 45.43/46 and closed stronger at 45.11/12.

There was a fair bit of intervention by the Reserve Bank of India (RBI) and dollar sales by exporters.

Dealers said the reverse intervention by the RBI "" selling dollars to pull up the rupee "" was aimed at providing a cushion for oil payments, some of which are due this week. Crude oil prices closed the week at $40.96 per barrel in New York Exchange.

Dealers feel the appreciation of the rupee is the most effective instrument to tame the effect of the surge in oil prices on the domestic economy.

Forward dollars, on the other hand, returned to a premium last week, reflecting the bearish sentiment on the spot rupee.

Six-month and one-year forward dollars closed the week at 0.4 per cent and 0.35 per cent, respectively. Gold importers were active in order to hedge their future payments.

The bond market got a boost from the cut-off yields announced at the twin auctions of government stock.

While a fresh issue of 12-year paper was auctioned at a cut-off rate of 5.59 per cent for a notified amount of Rs 6000 crore, the 24-year 6.01 per cent 2028 paper fetched a yield of 6.23 per cent for a notified amount of Rs 4000 crore.

The market had expected a cut off rate of 6.20-30 per cent for the 24- year paper and 5.60 per cent for the 12- year paper.

The ten year benchmark 7.37 per cent 2014 closed at 5.28 per cent as against 5.30 per cent on Wednesday.

Mutual funds and foreign banks are understood to have sold heavily to cut losses in the bonds market, which has witnessed a rise in yields on a daily basis, said dealers.

Mutual funds alone sold to the tune of Rs 400-500 crore as gilt schemes are incurring losses in view of the rising yields, they added.

Some dealers feel the continuous rise in yields has triggered limits to the extent losses can be borne by MFs in their respective portfolios.

In the last fortnight, the ten-year benchmark yield has gone up from 5.16/17 per cent to a high of 5.30 per cent. It had earlier touched around 5.28 per cent on May 17.

Some dealers also attribute the sales by banks and mutual funds to redemption pressure. The bearish sentiment in the domestic market is also due to several interest rate related factors in most Asian emerging markets.

Dealers feel dollar yields are poised to go up following the rapid recovery in the US economy. Similarly, the Eurozone is expecting a hike in interest rates with the rise in inflation.

Great Britain has already reviewed its base rates twice. Yields are also on a high in Japan, with a further upwards bias.

In India, the new government has signaled several welfare activities which have triggered fears of a higher government borrowing programme.

These factors hint towards an increase in interest rates any time now.

This has forced most gilt scheme managers and trading banks to reshuffle portfolios and realign them with the new rate structure.