Rupee could weaken further gilt yields to trade in a range

The rupee might weaken further against the dollar this week, amid dollar demand from importers. Strong demand from importers, coupled with weak equity markets, led the rupee to close at a two-month low against the dollar on Friday at Rs 55.18, as the Reserve Bank of India (RBI) did not seem to have intervened to arrest the slide.

“There is a lot of dollar demand due to import of oil, gold and defence equipment. The euro is also volatile due to persisting concerns in the Euro zone. These factors will keep the rupee weak against the dollar,” said S Srinivasaraghavan, executive vice-president and head-treasury of Dhanlaxmi Bank.

The rupee is also getting impacted due to weak domestic cues. “The rupee is now seen as the worst performing currency driven by weak domestic cues. There are no signs of early resolution to issues concerning growth, fiscal deficit, trade/current account deficit, inflation, investments, consumption, supply side bottlenecks, etc,” said J Moses Harding, head-asset liability committee and economic and market research, IndusInd Bank.

According to Harding, the rupee also lost traction with gains in the euro, while a weak euro weighs heavy on the rupee. “The expectation now is that either resolutions to weak macroeconomic fundamentals will either be delayed or denied.”

According to Srinivas-araghavan, the rupee is expected to trade in the range of Rs 54.75-55.50 this week. The winter session of Parliament starts from Thursday. However, this might not have much impact on the forex market, said Srinivasaraghavan. “Finance minister P Chidambaram will maintain in the session that the fiscal deficit will be restricted to 5.3 per cent of the gross domestic product (GDP) in the current financial year.”

Gilt yields, on the other hand, are expected to remain range-bound this week. “There are expectations of open market operations (OMOs) purchase auction of gilts. If that happens, then the yield on the 10-year benchmark gilt 15 per cent 2022 may drop to 8.16-8.17 per cent. The trading range this week for the 10-year benchmark gilt will be 8.15-8.19 per cent,” said Srinivasaraghavan.