Rupee, gilts tread downhill

Both the rupee and government securities were on a slippery slope yesterday.

The rupee pierced the 46-mark and closed at a one-week low of 46.09 against the dollar on Tuesday. The currency crossed the 46-level on June 22 when it closed weaker at 46.25 per dollar.

Meantime, the yield on the benchmark 10-year government security, 7.37 per cent 2014, closed higher at 5.83 per cent, compared with 5.79 per cent on Monday.

The slide in the rupee yesterday was due to oil companies' dollar demand, which triggered a bout of short covering by banks. The weaker sentiment in the currency market comes on the back of thinning foreign exchange inflows as foreign institutional investors (FIIs) have decided to stay on the sidelines till the government's future direction is indicated in its Budget on July 8.

The FIIs have sold over $800 million in the last two months following the election of the Congress-led government and due to the rising global interest rates.

In the government securities market the blow came from the Reserve Bank of India's (RBI's) announcement that the government would be raising Rs 6,000 crore of the planned Rs 8,000 crore borrowings on July 1 through the sale of 11-year floating rate bonds.

Another Rs 2,000 crore would be mopped up thorough the sale of 6.13 per cent 2028 securities on Thursday.

The central bank also announced the sale of Rs 36,500 crore worth of securities under the market stabilisation programme during the second quarter of this financial year.

There bearish sentiment in the forex and government securities market on Tuesday was not due to the US Federal Open Market Committee's meeting on Wednesday.

The committee is widely expected to raise the funds rate by 25 basis points to 1.25 per cent.

The bond markets have already priced in the rate hike. However, should the Fed go for a 50 basis point hike, yields on the domestic bonds will go up further.

Y V Reddy, the RBI governor, has already indicated that there could be a case for revisiting the central bank's interest rate stance with the global interest rates hardening. "If global trends exceed what we have assumed, there would be a case for revisiting domestic rates," he had said.

Meanwhile, the market is expecting a good response to floater issue, announced by the RBI, in view of the bearish outlook on interest rates. "Floaters will provide hedging against the rising interest rates," said a senior money market dealer with a private sector bank.

With the rise in credit offtake "" Rs 38,000 crore in the last quarter "" the market is concerned about the government borrowings programme for fiscal 2005. "The Budget holds the key for the interest rate outlook," said a senior banker.