Rupee seen weakening due to month-end dollar demand

On Friday the rupee appreciated to a one-month high and bond yields fell to an over three-month low

The rupee is seen weakening this week due to month-end dollar buying by importers. Government bond yields are expected to fall on expectations of a rate cut by the Reserve Bank of India (RBI) in its bimonthly monetary policy review on September 29.

On Friday, the rupee appreciated to a one-month high and bond yields fell to a three-month low after the US Fed decided to keep interest rates unchanged in its meeting. In percentage terms, this kind of appreciation in the rupee was last seen in September 2013 after Raghuram Rajan took over as the governor of the central bank and announced measured to cut volatility in the rupee.

“The US Fed decided to hold interest rates as a result of which stock market rallied on Friday. The rally in stock markets resulted in renewed interest by foreign institutional investors (FIIs). The gains in rupee also helped government bonds as a result of which yields fell," said N S Venkatesh, executive director and head of treasury at IDBI Bank. According to Venkatesh, this week, the rupee would trade in the range of 65.50 to 66.25 per dollar with a weakening bias.

On Friday, the rupee ended at 65.67 compared to its previous close of 66.46 per dollar. The Indian currency had ended at 65.55 per dollar on August 20.

In percentage terms, the gain in rupee was 1.19 per cent. The rupee had last gained by 2.54 per cent on September 19, 2013 to end at 61.78.

The yield on the 10-year bond ended at 7.70 per cent on Friday compared to its previous close of 7.75 per cent. The yield ended near a level last seen on June 1 at 7.64 per cent. Expectations are building up in the bond market that RBI might cut the repo rate - the rate at which banks borrow from the central bank - in the upcoming monetary policy review.