Rupee, bonds rally as street welcomes Rajan's steps

However, dollar demand from importers still exists, which could impact rupee

The rupee appreciated in early trade after the new governor of the Reserve Bank of India (RBI) Raghuram Rajan lifted market sentiment yesterday by announcing a slew of measures.

The rupee opened at Rs 66.10 compared with previous close of Rs 67.09 per dollar. At 15:48 pm, the rupee was trading at 66.23/dollar.

“We expect the foreign currency non-resident (bank) deposit-cum-swap facility to stabilise rupee expectations in absence of a major foreign exchange shock. After all, similar schemes, like the 1998 Resurgent India Bonds and the 2001 India Millennium Deposits – each of which raised $5bn - had been extremely effective in this regard,” said Indranil Sen Gupta of Bank of America Merrill Lynch in a note to clients.

To provide exporters/importers greater flexibility in risk management, RBI enhanced the limit available to exporters to 50%. The limit for importers was raised to 25%.

RBI also offered a window to banks to swap fresh foreign currency non-resident (bank) deposit or FCNR(B) dollar funds. These are mobilised for at least three years, at a fixed rate of 3.5% a year.

"We have decided the current overseas borrowing limit of 50% of the unimpaired tier-I capital would be raised to 100% and the borrowings mobilised under this provision can be swapped with RBI at the option of the bank at a concessional rate of 100 basis points below the ongoing swap rate prevailing in the market," Rajan said yesterday in his speech.

Currency dealers expect the rupee to rupee to move near Rs 65 per dollar mark during the day. However, dollar demand from importers still exists, which may put some pressure on the rupee.

The benchmark 10-year bond yield dropped as much as 22 basis points to 8.17%.