RBI cools down rising rupee; 10-yr yield drops
MONEY MARKET ROUND-UP
| The spot rupee reached an intraday high of 40.23/24 after opening at 40.40.35/36. However, the RBI intervened to buy dollars from the market to quell the rupee appreciation and as a result, the spot rupee closed at a low of 40.29 to a dollar. |
| While volumes in the government securities market reached Rs 10,000 crore on Monday and the yield on the benchmark ten-year paper fell to 7.75 per cent as against 7.82 per cent last week, forward dollars for the next three months were ruling at a discount. |
| Incidentally, the ten-year paper fetches the same rate as that of the liquidity infusion rate of the RBI (repo at 7.75 per cent), which is the money lent for a day usually. |
| Call rates, at which banks lend to other banks, continued to rule below 1 per cent by closing around 0.30 per cent. Prices of government securities moved up by 20-25 paise in the short-term maturity, while the medium- and long-term papers witnessed prices going up in the range of 40-85 paise. |
| In the corporate bond market, the spread between the 10- year government paper and the triple-A corporate bond of similar maturity narrowed down to 140 basis points as against a high of around 200 bps a few weeks earlier. |
| One basis point is one hundredth of a percentage. Volumes in interest rate swap deals based on overnight MIBOR also reached Rs 5,000 crore, backed by the view that the RBI may take a pause in its interest rate stance in the forthcoming monetary policy review. |
| According to dealers, banks and mutual funds have started aggressively investing in the corporate bonds to earn the interest rate differential. The interest rate for triple-A papers in the ten-year maturity has come down from the highs of 10 per cent to 9.30 per cent and is further expected to come down to 9 per cent following excess liquidity. |
| On the other hand, interest rates on one year certificate of deposits have come down from 9 per cent to 7.5 per cent. Dealers expect the rate on two to three months' CDs to come down to 4 to 5 per cent against the highs of 10 per cent a few weeks earlier. |
| Similarly, following the low-cost of rupee funds and heavy selling of dollars by corporates and banks, forward dollars for three months slipped into discount. Usually a premium (spread over the spot rupee-dollar exchange rate) is to be paid to book dollars for a future date called forward dollars. |
| On the contrary, forward dollars are available cheaper than the spot rupee since the view is that the rupee may continue to appreciate following heavy foreign exchange inflows, said a forex dealer of a PSU bank. |
| Bloomberg adds: Ten-year bonds gained for a third day after the central bank cut by more than half debt sales aimed at draining spare cash from the banking system. |
| Yields fell to the lowest in 5 1/2 months after the Reserve Bank of India said July 20 it will sell bonds and treasury bills worth a total 45 billion rupees ($1.1 billion) this week to drain funds, compared with 95 billion rupees last week. Bonds also gained on speculation dollar purchases by the central bank in the currency market will boost cash at banks. |
| "Bonds are rallying because the central bank has reduced its stabilization bond sales this week,'' said Anoop Verma, a bond trader at Development Credit Bank Ltd. in Mumbai. ``There's a lot of money in the system." |
| The yield on the benchmark 7.49 percent note due April 2017 fell 6 basis points, or 0.06 percentage point, to 7.75 percent as of the 5:30 p.m. close in Mumbai, according to the central bank's trading system. The price rose 0.44, or 44 paise per 100 rupee face value, to 98.25. |
| The Reserve Bank sells bonds and treasury bills every week to drain excess cash in the economy that may stoke inflation. The bank has a yearly limit of 1.1 trillion rupees on such sales. |