Rupee becomes worst-performing Asian currency; bonds rally in 2020

Rupee has depreciated 2.3 per cent in this calendar year

Bonds closed stronger on the last day of 2020 and the rupee weaker as the Reserve Bank of India (RBI) followed opposite strategies for the two throughout the year.
 

The rupee ended at 73.1 a dollar on Thursday, against 71.4 at the end of 2019. It has depreciated 2.3 per cent in this calendar year, becoming the worst-performing currency in Asia. The rupee’s performance is also in sync with the aggressive foreign exchange reserve accumulation by the RBI.
 

According to the latest numbers, as of December 18, India had $581 billion-plus of foreign exchange reserves. This is an increase of $120 billion.
 

On a net basis, the portfolio flow in both debt and equity has been about $9 billion. This would indicate that not all the reserves accumulation in the year has been on the back of current accounts only. There is some amount of permanency in India's reserves now, say analysts, and it also shows that the RBI’s intervention in the rupee was made with a purpose to keep the local currency weak.
 

This is also to address the overvaluation of the rupee in the previous few years, say analysts. Therefore, most don’t expect the rupee to strengthen in a huff in the new year. Rather, it would be in the country’s advantage to keep the currency a little weak.

The 10-year bond yields closed at 5.865 per cent, against 6.555 per cent at the end of 2019. This is a massive boost to the bank treasuries, especially private banks that decided to book profits on their investments, according to the Trends and Progress Report of the RBI. As yields fall, prices of bonds rise, and vice versa.
 

The RBI flooded the system with liquidity, doubled the secondary market bond buying lot size, and even engaged in verbal persuasion to convince bond investors to continue buying bonds and help the RBI sail through a record Rs 13.2-trillion borrowing programme of the government. The RBI had to also make sure states could borrow their needs, without crowding out private corporations.
 

Lakshmi Iyer, chief investment officer (debt) at Kotak Mahindra Asset Management, said: “Going into 2021, the theme would be to ‘chase the carry’ while capital gains may likely play second fiddle to the bond markets.”
 

“There are incipient signs of global economic recovery in sight and therefore the need to ease rates by central banks may be limited.” She said liquidity may not exit the banking system in a tearing hurry. Hence, we may see range-bound yield movements and thus a much needed anchor for yields may well be available in the coming year as well.