Sovereign rating prospect change limits rupee rise

Bond yields rise on fiscal health warnings

Dollar sales by foreign banks ahead of a US Federal panel meeting scheduled on Wednesday supported the rupee. The gains, though, were capped due to Standard & Poor’s (S&P) revising India’s sovereign rating outlook.

After opening at 52.75, the rupee had risen to 52.46 per dollar in early trade on the back of dollar selling by companies. It fell to 52.74 after the ratings update by S&P. The rupee closed at 52.54 as compared with the close at 52.68 yesterday.

“There was dollar supply from foreign banks squaring off positions with the focus on the Federal Open Market Committee meeting in the US,” said a foreign exchange dealer with a domestic consultancy firm. There was no intervention from the Reserve Bank of India, he added. Traders said a weaker dollar against the euro also helped the rupee appreciate against the greenback. However, the rupee is seen weak. “The market sentiment is already negative and any such news would further push equities and currency on a downward trajectory,” said Abhishek Goenka, CEO, India Forex Advisors.(RATING ROAD MAP)

Indian bond markets reacted negatively as S&P raised concerns on India’s growth prospects and high fiscal and current account deficit. The international ratings agency said it expected only modest progress on fiscal and public sector reforms in India. The yields on government bonds jumped 7-10 basis points after the ratings update. On Wednesday, yields on the 10-year benchmark government bond touched an intraday high of 8.65 per cent before closing at 8.63 per cent, six basis points higher than yesterday’s close.

The ratings agency also raised concerns on the government’s high market borrowing. The government has pegged Rs 5.69 lakh crore of gross market borrowing for the current financial year against Rs 5.1 lakh crore raised in 2011-12. It has already raised Rs 49,000 crore via sale of dated securities this financial year. RBI has announced auction of Rs 16,000 crore worth of government bonds on Friday. Yields are expected to edge up further, as traders will sell papers to make room for fresh supply.