Rupee seen up on hopes of intervention by central bank

Bond yields may ease on improved liquidity.

Positive global cues and firm comments from a senior official at the Reserve Bank of India (RBI) — that the central bank will use tools to check severe depreciation — may lift the rupee against the greenback this week.

On Friday, the rupee snapped a four-week fall to post a two per cent weekly gain, as exporters and foreign banks sold dollars on hopes that the central bank will step in to arrest a further fall. "We do have the instruments and the capacity to enhance the supply of foreign exchange into markets, and as demonstrated by recent actions, will use them as appropriate," said RBI deputy governor Subir Gokarn. He added that "smoothing" interventions have been carried out.

Economists said India's foreign currency assets were down because of intervention and, in part, revaluation. RBI data showed the country's foreign exchange reserves had plunged to $304 billion on November 25, a level not seen since March.

Improved risk appetite globally after six central banks joined hands to increase dollar liquidity and positive US economic data will help rupee appreciation this week. However, the two per cent rise in the Indian currency in the previous week may prompt oil importers to buy the greenback at attractive levels, thus limiting gains.

Yields on the 10-year benchmark government bond may ease further, as the central bank has said it will maintain adequate liquidity. Gokarn said the banking system could avail of Rs 2.74 lakh crore of additional liquidity from RBI's repo window against excess government bond holding. He said Indian banks hold 29 per cent of net demand and time liabilities as statutory liquidity ratio, against the 24 per cent mandated.

On Friday, yields on the 10-year benchmark government bond closed at 8.65 per cent, as the RBI had bought securities worth Rs 15,000 crore through open market operations for two consecutive weeks. Traders expect weekly OMOs for the rest of the month.

While market participants expect a cut in the reserve ratios, in light of the tight liquidity conditions, the RBI deputy governor said the central bank would use OMOs and repo auctions to infuse liquidity. He was speaking at an event in Mumbai on Saturday.

"While RBI's policy stance is expected to stay supportive; supply side issues will continue to stay valid," said Moses Harding, head of the global markets group at IndusInd Bank.