Rupee expected to weaken; bond yields seen falling

The rupee is expected to weaken this week on the back of dollar demand from oil importers and the market is expecting the index of industrial production (IIP) for December to weaken further, resulting in outflows of foreign institutional investor (FII) money from domestic equities.

IIP contracted to a four-month low of 0.1 per cent in November as the base effect turned adverse. “The IIP may contract further due to which the rupee may weaken. FIIs will pull out from domestic markets if IIP contacts further,” said S Srinivasaraghavan, executive vice president and head-treasury of Dhanlaxmi Bank. According to Srinivasaraghavan the rupee is expected to trade in the range of Rs 53.40-54.00 against the dollar this week.

The rupee ended at Rs 53.51 on Friday compared with the previous close of Rs 53.22. The rupee weakened due to sustained dollar buying by foreign banks on behalf of oil importers.

The wholesale orice index (WPI) inflation data for January is also expected this week, which will impact the government bond yield movement. The WPI stood at 7.18 per cent in December 2012 compared to 7.24 per cent in the previous month.

The yield on the 10-year benchmark government bond ended at 7.84 per cent on Friday compared with the previous close of 7.88 per cent. According to Srinivasaraghavan the yield is expected to be in the range of 7.87 per cent to 7.80 per cent this week. The bias is towards fall in yields as inflation is expected to soften further.

However, the market does not expect the yield to drop below 7.80 per cent. “It would need more than 25 basis points repo rate cut to trigger extended gains in the 10-year bond below 7.80 per cent, which is not seen to be on the radar right now,” said J Moses Harding, head - ALCO and economic and market research, IndusInd Bank.