Rupee climbing fast to the dollar, 10-year bond yields back to 6%

With the second wave subsiding and equity markets witnessing flows, the Indian rupee is climbing up against the US dollar.  

At the same time, the Reserve Bank of India (RBI) is trying to maintain a tight leash on the 10-year bond rates, and once again devolved them in Friday’s auction.

The partially convertible currency closed at 72.45 a dollar, down from its previous close of 72.60 a dollar. In the intraday trade, the rupee rose to 72.32 a dollar level, a two-month high.  

Rupee’s strength has been relatively quick. On May 20, it had closed above 73.11 a dollar. There were also apprehensions that the rupee could cross 75 a dollar, prompting importing companies to hedge their exposure at around 73 level.  

But the rupee has surprised many by strengthening back as the pandemic wave seems to be subsiding in the region.  

The rupee followed other currencies in the region in its strength against the US dollar. Philippine's peso rose to lead the pack in Asia, climbing 0.4 per cent against the dollar, rupee rose 0.21 per cent.  

The dollar index, which measure’s the greenback’s strength against major currencies, however, climbed 0.47 per cent to 90.4.

Amit Pabari, managing director of CR Forex Advisors said foreign fund inflows are leading to the rise in equity markets, and therefore boosting the rupee. Rupee has advanced on the back of MSCI inflows worth $1.2 billion into Indian stocks.  

“Further, flows had been steady into the bond market also as global traders seem attracted towards stable yield, lower volatility in currency and feasible forex hedging cost," said Pabari.  

At the same time, the RBI is not seen intervening in the forex market, say currency dealers.  

However, the central bank is expected to come back to the market. The rupee, and for that matter, other Asian currencies are closely following Chinese yuan, which has appreciated a percent this week to 6.3619 to a dollar, its highest level in three years.

“The rupee appreciated for the fifth straight week against the U.S. Dollar tracking gains in the Chinese yuan and due to the continued absence of the Reserve Bank of India in the spot market,” said Sriram Iyer, senior research analyst at Reliance Securities. For the week, the rupee gained 0.5 per cent, adding to an aggregate rise of nearly 3% in the last four weeks, Iyer said.

Meanwhile, bond traders are certain that the RBI will not let the 10-year bond yields rise much beyond 6 per cent, as the central bank is focused on that particular bond as its rate signal.  

The RBI auctioned Rs 26,550 crore on Friday, of which 19,114 crore was accepted by the RBI while Rs 7,437 crore of bonds had to be bought by the primary dealers, the underwriters of the bonds. The 10-year bond yields closed at 6 per cent after the auction.  

Total market borrowings were Rs 1.1 trillion in May 2021, Rs 6,545 crore more than borrowings in April 2021, according to rating agency CARE.

The amount raised so far in FY22 is Rs 2.1 trillion, 17.5 per cent of the total budgeted market borrowing limit of Rs 12.05 trillion in FY22 and 30 per cent of

the first half borrowing of Rs 7.24 trillion.  

The total borrowings by the Central government so far are 55 per cent more than the corresponding period last year as “localised lockdowns and the consequent impact on revenue collections of the Central Government have led to higher borrowings,” said Care Rating’s chief economist Madan Sabnavis.