Rupee, gilts rally; forwards in a higher groove

RECAP

Bonds and the foreign exchange markets rallied last week even though they had breached psychological barriers in the previous weeks.

While the 10-year benchmark government security yield touched 5.11 per cent, the spot rupee appreciated to close at 43.53-43.54 against the dollar. The rupee had touched lower levels in intra-day deals a couple of weeks before.

As the latest inflation rate of 4.47 per cent was released by the government on a holiday (Friday), the impact was not immediate.

However, dealers feel that the figure was higher than expected and might not contribute to a rally this week. The liquidity situation continues to be abundant, even though funds are flowing in tranches owing to the redemptions at seven-day repos.

Last week the market was upbeat about the inflation rate as it was not only supported by the base effect but also by a fall in prices.

On the other hand, the robust foreign exchange inflows amid RBI intervention took the rupee up to close at 43.53/54 last week. Dealers said that the RBI's stand has been prompted by Bank of Japan which is understood to have stopped dollar buying and letting the yen to appreciate as exports growth remains strong.

In India, despite an appreciating rupee exports have continued to grow. Dealers feel that the RBI, through dollar buyings by public sector units, will be supporting the spot rupee at 43.50-60 to a dollar and it has rendered the market flat for many trading sessions.

They also feel that the RBI's intervention will not be aggressive as the inflation rate is also being targetted.

Bond prices, on the other hand, went up by 60-70 paise in the long-end along with brisk trading in short-end papers.

For the entire week, while the spot rupee remained range-bound with an upside bias with the RBI support, gilts rallied on the back of excess liquidity.

With no other avenues to park funds, banks opted for gilt investments and in the process illiquid gilts also became active.

In fact, most of the banks have been active in corporate bonds to gain on yield differential. Though forward premiums remained positive, they ruled range-bound owing to the intervention of the RBI in the forex market.

Therefore, the premiums commanded by various tenor of the forward dollars amount to the extent of swaps done by RBI to infuse cash dollars in the market and buy them back from the market at a future date, thereby creating paying pressure in the market.

Moreover, receiving pressure was observed in the market as exporters, helped by the support of the RBI, are booking receivables.