Last financial year was a great one for rupee and bonds

Movement in rupee happened in the last one month of FY17, particularly after the BJP's victory in UP

At the end of the financial year 2016-17, rupee stood at 64.85 a dollar and the yields of the 10-year government bond at 6.68 per cent, both rallying  considerably higher than their year’s start.
 
The rupee had started the last fiscal year at 66.21 a dollar and the bond yields were at 7.47 per cent. As bond yields fall, prices of bonds rise. For every one basis point movement, bond prices generally move by about 6-7 paise.
 
Meanwhile, credit growth in the system continued to remain tepid due to lending aversion by the lenders on bad debt concerns and unwillingness of companies to expand their capex, as about 30 per cent of the installed capacity remained unutilised. But deposit growth after demonetisation shot up. According to latest data, till 17 March, credit growth in the banking industry was only 4.4 per cent, while deposits grew 13 per cent. The outstanding deposit is also much larger than the credit base. Total outstanding deposit as on 17 March was Rs 105.42 lakh crore, whereas the total credit is just over Rs 75 lakh crore.

 

Therefore, the slack in credit growth meant that the excess money went into the investment book of banks. The year-on-year growth in investments was at 22.2 per cent, compared with just 5.4 per cent growth in the year ago period.  Therefore, a fall in bond yields and the resultant rise in price meant that banks reaped heavy profits even in an environment where credit growth was extremely tepid.
 
Even as the Reserve Bank of India (RBI) keeps a tight lid on policy rates, bond yields could fall in the immediate term, say bond dealers. This is because foreign investors have still not exhausted their limits in the government bonds. As on March 30, foreign investors have only exhausted 85.85 per cent in the central government securities.

 
The talking point of the past fiscal year, though, would be rupee. The movement in rupee really happened in the last one month of FY17, particularly after the Bharatiya Janata Party’s victory in Uttar Pradesh. “The rupee’s sharp appreciation vis-a-vis the dollar over the last few weeks has indeed taken market participants by surprise since the consensus was for stability and moderate depreciation going forward,” HDFC Bank wrote in a report.
 
On February 13, rupee was trading at 67.02 a dollar level. After the markets opened after the BJP’s win, rupee closed 14 March at 65.82 a dollar. At Friday’s close, it was at a 17 month high. Year-to-date, rupee rose 4.74 per cent, the best performing currency in Asia after Taiwanese dollar.

 
HDFC Bank expects rupee to scale back from its strength, as the dollar starts gaining strength. By December, the bank expects rupee to reach 67-68 a dollar level.
 
Brokerage Edelweiss too expects the rupee to touch 68-69 a dollar by December, as the recent move, Edelweiss says, was  “partly frothy and may fade.”
 
However, some analysts are quite bullish on rupee.
 
“The rupee is expressing its intrinsic value now. The weakening dollar, steady domestic growth, dipping inflation and an export growth are seeing foreign institutional investors’ flows also picking up. This is likely to be the current theme,” said Satyajit Kanjilal, managing director of Forexserve. He expects rupee to strengthen as much as 60-63, if the local currency breaches 64.50 a dollar mark.