RBI's rate hike action weakens rupee, bond yields rise

The Reserve Bank of India's (RBI) decision to hike the repo rate by 25 basis points to 7.50% resulted in the rupee weakening and government bond yields rising sharply.

The rupee wiped off yesterday's gains which was led by US Fed's decision against reducing its massive monetary stimulus known as third round of quantitative easing.

The rupee ended at Rs 62.28 compared with previous close of Rs 61.78 recording a weakening of 0.81%. The rupee had opened at Rs 62.05 and during intra-day trades it touched a high of Rs 61.89 and a low of Rs 62.60 per dollar.

The yield on the 10-year benchmark government bond 7.16% 2023 rose by 39 basis points to end at a two-week high of 8.58%. The yield had ended at 8.63% on September 6.

“Today's weakening in the rupee is due to a knee-jerk reaction to the equity sell-off that we saw immediately post policy. However the partial reversal of the liquidity tightening measures and raising the repo rate will give some comfort,” said Brijen Puri, executive director and head of markets, JP Morgan.

According to currency dealers the rupee ended weak today despite RBI selling dollars heavily through state-run banks. Since the start of this fiscal the rupee has weakened by almost 15%.

However, stability in the rupee is expected in the near-term.

“RBI has taken a balanced approach - policy rate hike is to address concerns on rupee/inflation and reduction in Marginal Standing Facility rate and Cash Reserve Ratio product reduction to be seen as supportive to growth. It was very innovative and street-smart move when US Fed led euphoria is high in the market. The balanced stance will ensure rupee stability at Rs 61-63 in the near term,” said J Moses Harding, executive director and chief business officer, Lakshmi Vilas Bank.

RBI will auction government bonds for a notified amount of Rs 15,000 crore on Monday due to which sentiments in the bond market may continue to be bearish.

“The 7.16% 2023 bond may trade in the range of 8.65-8.40% next week. There may also be partial devolvement in Monday's auction,” said S Srinivasaraghavan, head of treasury at Dhanlaxmi Bank.