Rupee volatile, securities move in a range

RECAP

Uncertain domestic political scenario and expectations over a rate hike by the US Federal Reserve on the back of good economic data led to a sluggish market trend last week.

While the foreign exchange market was volatile owing to demand from the inter-bank market and dollar selling by exporters, the bond market moved in a range with yields firming up to 5.13 per cent from the week's opening level of 5.09/5.10 per cent.

The rupee lost 50 paise against the dollar in the beginning of the week touching 45.01 against 44.51 at the end of the previous week.

This was a five-week high in a volatile market which saw the Reserve Bank of India (RBI) intervening by buying and selling dollars at different points.

Importers, following the rise in dollar, rushed to cover their exchange risks in the forward market, while exporters cancelled their forward contracts and booked new contracts.

Forward rates continued be quoted at a discount with the cash dollar shortage continuing in full swing. According to dealers, dollar supplies have dried down and the central bank has become an aggressive buyer whenever the rupee shows signs of appreciation.

These factors have also strengthened the dollar and also led to a shortage of cash dollar in the market. Overall the market ended range-bound towards the end of the week.

Despite the recent exit poll predictions of the NDA coalition coming back to power at the Centre, the market sentiment was weak and players were cautious.

Forward premiums ended firm as the rupee stabilised towards the end of the week, though cash dollar shortage continued.

Despite the inflation rate being pegged at 4.26 per cent and the outstanding liquidity in the system at Rs 80,000 crore as evident from the balance with the seven-day repo, bond dealers were a concerned lot last week.

Prices of long and medium term papers dipped and yields went up in subsequent sessions. Dealers are of the view that the liquidity has ceased as a trigger for the prices to go up and there is a general feeling that interest rates will remain neutral after the decision of the Federal Reserve to review rates in the future.

For most part of the week profit booking led to a fall in government security prices across maturities. On a daily average, long-term papers saw a fall of 30-35 paise, while in the medium-term they dipped by 15-20 paise.

The 10-year benchmark 7.37 per cent 2014 closed at around 5.13 per cent. Though the market trend was bearish, the cut-off rates at the auction of the two government stocks - the 12-year floating rate bond and the 24-year security "" were lower.

According to dealers, the wide gap between the market rates and cut-off yield reflects a nervousness among market players who are aggressively bidding to bring down the rates to ensure a soft rate regime.

Going by the proceedings of the Federal Reserve and other central banks, market players foresee a rise in interest rates.