Rupee might fall further; bond yields expected to rise

Rupee ended at 60.49 a dollar on Tuesday compared with the previous close of 59.42

The rupee is expected to weaken further on Wednesday due to month-end dollar demand from importers, as well as the Reserve Bank of India (RBI) expressing reservations on issuing sovereign bonds.

"A sovereign bond issue would compromise financial stability; the cost of a sovereign bond issue outweighs the benefits at the current juncture," RBI Governor Subbarao said at a press conference after announcing the central bank's first-quarter review of monetary policy on Tuesday.

The rupee closed at 60.49 against the dollar on Tuesday, against its previous close of 59.42. It had opened at 59.63 a dollar and, during intra-day trade, touched a high of 59.54. During the last hour of trade, it touched a low of 60.58. The rupee breached the 60-a-dollar mark for the first time after the central bank had announced liquidity-tightening moves earlier this month.

"The rupee is expected to weaken further tomorrow, as month-end dollar demand from importers continue. It is expected to touch 60.65 tomorrow," said the head of treasury of a large public sector bank. Earlier this month, it had touched an all-time low of 61.22 a dollar. However, after RBI announced liquidity tightening moves to restrict speculative trade, the rupee stabilised.

On Tuesday, government bond yields rose, owing to the weakening rupee. The yield on the 10-year 7.16 per cent government bond ended at 8.25 per cent, compared with its previous close of 8.13 per cent. During intra-day trade, the yield fell to 7.99 per cent, as concern on further liquidity tightening-moves by RBI disappeared after the central bank announced a dovish policy stance. Subsequently, as the rupee weakened, the yield rose to 8.26 per cent.

"The yield may rise further tomorrow and touch 8.3 per cent, as the rupee is expected to weaken further from current levels," said a government bonds dealer with a public sector bank.