Government securities fell, pushing the yield on 10-year benchmark bonds to the highest in a week, after the Reserve Bank of India (RBI) raised its key overnight rates for the third time since March to combat inflation.
RBI raised repo and reverse repo rates by 25 basis points each to 5.5 per cent and 4 per cent on Friday after trading hours as part of its calibrated exit from the expansionary monetary policy. RBI said strong growth momentum was witnessed by an upturn in capital goods sector and rise in demand for loans and widening of current account deficit. This was the third rate rise beginning March by 25 basis points each.
Inflation rose to 10.16 per cent in May and last month’s rise in fuel prices is likely to add another 100 basis points to inflation immediately, with second round effects coming in the following months, RBI said.
Yield on the 7.8 per cent bonds maturing in 2020 rose to 7.61 per cent from 7.56 per cent on Friday, according to data on the Clearing Corp of India website.
Rupee halts 2-week slide after RBI raises rates
The rupee halted a two-week slide after the Reserve Bank of India (RBI) increased benchmark borrowing costs for the third time this year.
RBI on July 2 raised the repurchase and reverse-repurchase rates by a quarter-percentage point each to 5.5 per cent and 4 per cent, respectively, to curb inflation. It announced the policy changes after local markets closed that day. While the rupee may rise as higher yields attract some investors, such gains won’t be sustained amid concern the global economic recovery is faltering, according to Priyanka Chakravarty, a strategist at Standard Chartered.
“The initial reaction for the rupee may be positive, as better carry attracts flows,” Mumbai-based Chakravarty said. “However, the move is unlikely to be sustained as global developments remain in the driver’s seat. Growing concerns regarding the global growth outlook and persistent sovereign risks are likely to keep capital inflows fickle.”
The rupee was at 46.78 per dollar as of the 5 pm close in Mumbai, compared with 46.79 on July 2, and rose as high as 46.675 earlier. It lost 1.1 per cent last week, the most in more than a month. Standard Chartered predicts the rupee will weaken to 47 by the end of the current quarter.
Offshore forward contracts indicated the rupee will trade at 47.32 to the dollar in three months, compared with expectations for a rate of 47.28 at the end of last week. Forwards are agreements to buy or sell assets at a set price and date. Non deliverable contracts are settled in dollars. The rupee may rise as high as 46.50 in the next few days, said Krishnamurthy Harihar, treasurer at the Indian unit of FirstRand, South Africa’s second-largest financial services company.
Call ends down
Call money rate ended slightly down after touching 6.15 per cent intraday as demand for funds waned towards close of trade, dealers said. The one-day call money rate ended at 5.75-6.00 per cent down from 6.00 per cent for two-day loans on Saturday. Liquidity had tightened in the system due to payment of around Rs 1 lakh crore for 3G and broadband spectrum in June.
Call rate crossed the six per cent mark after the Reserve Bank of India (RBI) on Friday increased reverse repo and repo rates by 25 basis points each to four per cent and 5.5 per cent, respectively. RBI also extended the second liquidity adjustment facility (LAF) until July 16.
on Monday, RBI received bids worth Rs 48,750 crore at the first repo tender and banks parked Rs 45 crore at the first reverse repo tender.
