Inflation numbers rip off bonds, rupee see-saws

RECAP

While the domestic inflation figures announced on Friday acted as a jolt for the market, the poor job data released in the US acted as a positive trigger since it is unlikely that Fed will hike rates.

A hike of almost 100 basis point in inflation rate at 7.51 per cent released for the week ended July 23 compared to 6.52 per cent in the previous week left the market shell-shocked.

Bond prices was on a downslide almost every day of the week but the fall was steep on Friday when the 10-year benchmark 7.37 per cent 2014 paper closed at 6.28 per cent, 15 basis point higher than the Thursday close of 6.13 per cent after an intra-day high of 6.31 per cent. Prices at the long end of the maturity fell by almost Rs 1.50 while the medium term ones came down by Re 1.

Rising minerals, food and manufactured product prices fuelled the inflation. For the corresponding period in July 2003, inflation was at 4.27 per cent.

Bond dealers are of the view that the inflation data will be a cause for worry for the next two to three weeks. This is because the rising oil prices, internationally as well as domestic, will have to be factored in. Thereby in all possibility, the inflation rate will hover close to 8 per cent. However, the US job data released on late Friday gave a below expected number of 32,000 as against an expectation of 2,28,000, which will act as a positive trigger for the Indian markets, said bond dealers.

Meanwhile, the spot rupee also came under pressure even though it closed higher on the back of dollar selling by the Reserve Bank of India. On Friday, it opened at 46.40/42 and went up to a low of 46.48 but closed at 46.37 to a dollar. However, importers rush for covering their positions at every possible hike in the rupee-dollar rates made the forward to remain high with six-month and one-year forward dollars closing at 2.5 per cent and 2.05 per cent, respectively.

The week witnessed a depreciation in the dollar almost every day as oil companies have been making payments almost every day as against waiting for the month end.

On Wednesday and Thursday, the finance ministry officials including the finance minister had made several reassuring statements on the inflation front and the rising bond yields. The crux was that the inflationary pressure is only temporary and so the rising bond yields. The monsoon will act as a moderator to the rising rates. However, Friday's figure was explained as part of the statistical reasons involved in calculating the figure.

Meanwhile, the spot rupee during the week gained, rising all the way up to 46.28 to a dollar on the back of foreign exchange inflows from the foreign institutional investors.

However, dollar buying by a PSU bank to meet importer demand in the later part of the day led to many interbank players caught with open positions.

These interbank players have sold dollars expecting to buy it at a later date when the spot dollar value will appreciate, with the inflow proceeds from the Tata Consultancy Services.

However, with the PSU bank buying dollars, they were caught napping on the wrong side as the spot dollar started depreciating, said a dealer.

Tracking the spot rupee, the premium on forward dollars eased during the day but tightened later with six-month and one-year closing at 2.44 per cent and 1.99 per cent, respectively.