Rupee seen weakening; yields may rise

The rupee is likely to weaken this week and government bond yields are expected to rise, as the Street expects the Reserve Bank of India (RBI) to raise the repo rate in its mid-quarter policy review on Wednesday, due to inflation concerns.

The rupee ended weaker at 62.13 a dollar on Friday, compared with Thursday's 61.83. The currency had opened at 62.11 a dollar and during intra-day trade, touched a low of 62.28. The yield on the 10-year benchmark government bond ended at 8.9 per cent, compared with Thursday's 8.8 per cent. The Wholesale Price Index-based inflation data for November, expected on Monday, will provide further direction to the expectations on the monetary review. November's Consumer Price Index-based inflation rose to 11.2 per cent from 10.1 per cent in October.

"The market believes there will be a repo rate hike, in which case, growth will be hurt and foreign investors will sell equities. Naturally, the rupee will get affected," said a currency dealer with a public sector bank.

After a brief appreciation, the rupee has again started weakening. Most currency dealers predict it will head towards 63 a dollar this week. There are also concerns on the US Federal Reserve's tapering, keeping the rupee under pressure. Meanwhile, the market expects government bond yields to rise. "The yield on the 8.83 per cent 2023 bond may rise to nine per cent. Inflation is again high and a rate rise looks likely," said a treasury head of a public sector bank.