Re, bond yields up on policy step

The rupee on Tuesday breached the 50-mark against the dollar for the first time in two and a half months, touching 49.93 per dollar after the Reserve Bank of India (RBI) reduced the cash reserve ratio (CRR) to improve liquidity conditions in the domestic financial system. A surge in domestic equity markets also aided the local currency’s appreciation.

However, the rupee erased most of the early gains on high dollar demand from oil importers towards the end of the day, closing at 50.09, almost unchanged from yesterday’s close of 50.1 per dollar.

Economists said the rupee was likely to benefit from the monetary easing policy of the central bank in the coming months. “The change in RBI’s stance to support the real economy is likely to revive the appetite for domestic assets, ensuring the rupee remains bid in the near term,” said Abheek Barua, chief economist, HDFC Bank. He expects the rupee to move to the 49.60-49.80 range in the near term.

The rupee’s recent appreciation could be attributed to a slew of measures taken by RBI in the past two months. “Do not be under the impression that these measures are temporary,” RBI governor D Subbarao said on Tuesday.

Bonds
Yields on the 10-year benchmark government bond hardened after the governor hinted at discontinuation of open market operations (OMOs). “We will look at how the CRR reduction goes out. We’ll look at the government’s borrowing programme. Only if necessary, we may do OMOs. We may not do OMOs, but it is too early to decide that,” Subbarao said. After trading in the range of 8.07-8.38 per cent, yields ended 18 basis points higher than yesterday’s close. RBI has infused Rs 70,000 crore through eight rounds of OMOs since November.