Rupee expected to strengthen, bond yields to drop

Dollar sale by foreign banks and corporates caused the firming trend in rupee

The rupee is expected to strengthen further this week supported by capital flows. The rupee ended at an over two-month high on Friday amid dollar sale by foreign banks and  corporates.

It closed at Rs 53.71 per dollar compared with Thursday's close of Rs 54.39.

“The rupee will trade in the range of Rs 53.40-54.00 per dollar this week. Dollar flows are expected to continue even this week,” said S Srinivasaraghavan, executive vice president and head- treasury of Dhanlaxmi Bank.

Friday was the second straight day when the rupee strengthened against the dollar. Thursday's rupee appreciation was triggered by oil minister Veerappa Moily's announcement of partial deregulation of diesel pricing by allowing oil companies minor hikes in prices. The market views this as a positive move by the government towards fiscal consolidation and it shall help in increasing capital flows.

However, there are also possibilities of month end dollar demand by oil importers emerging this week. Friday there was absence of major dollar demand from oil importers and that also had helped the rupee to strengthen. 

Yields of government bonds are expected to drop this week amid repo rate cut hopes later this month. “There are possibilities of the yield on the 10-year benchmark bond 8.15% 2,022 touching 7.80% this week,” said a bonds dealer with a state-run bank. The street is expecting a rate cut on January 29 when the Reserve Bank of India (RBI) will detail the third-quarter monetary policy review.

The yield on the 10-year benchmark bond ended at 7.87% on Friday compared with previous close of 7.84%. Yields rose on Friday due to profit-booking by traders.