Rupee touches new low, bond yields soften as MPC meeting gets underway

The rupee depreciated to a new closing low of 84.74 per dollar on Wednesday due to a rise in the dollar index and strong demand for the greenback among importers, said dealers

The rupee depreciated to a new low against the dollar while bond yields fell on the expectation of a softer interest rate regime on Wednesday, as the three-day December monetary policy meeting gets underway.

 

The Reserve Bank of India will announce the review of the policy on Friday. The rupee depreciated to a new closing low of 84.74 per dollar due to a rise in the dollar index and strong demand for the greenback among importers, said dealers. The previous low was 84.70/$ on Monday.

 

“The dollar index rose again, and the RBI was there at around 84.70 per dollar, we might see some strong resistance at around 84.75 per dollar level,” said a dealer from a private bank.

 

 

The rupee had settled at Rs 84.69 per dollar on Tuesday. The rupee has been witnessing depreciation bias and is expected to remain under pressure after disappointing domestic economic data.

 

Market participants said that the local currency is trading towards 85 per dollar and might breach the psychologically crucial mark by the end of the current calendar year.

 

“Pressure might also build from indications that intervention efforts have led the central bank’s aggregate short position in forwards and futures position to rise sharply in October and are expected to climb by another $15-20 billion in November. Strong official presence has supported the currency, with the INR down only -1.8% on YTD terms, among the better performers in the region. In a high US yield environment, a rate cut might narrow rate differentials further, creating further pressure on the rupee,” said DBS bank in a note.

 

Meanwhile, the benchmark 10-year government bond yield has softened by 10 basis points in December due to expectations of a rate cut by the rate-setting panel on the back of weak economic data. The benchmark yield settled at 6.68 per cent on Wednesday, against 6.72 per cent on Tuesday.

 

In its October monetary policy committee (MPC) meeting, the domestic rate-setting panel kept the repo rate unchanged at 6.50 per cent but shifted its stance to neutral due to easing inflation at the time. However, headline inflation rose to 6.21 per cent in October, while GDP growth slowed to 5.4 per cent in the second quarter of the current financial year, dividing the market on the expectation of a rate cut.

 

“The yields are falling because of rate cut hopes, also there are expectations of liquidity measures to be taken by the RBI,”  said Vijay Sharma, senior executive vice-president at PNB Gilts. “We expect the rate cut only in February,” he added.