Rupee weakens as govt rules out sovereign bond option

By Swati Bhat

MUMBAI (Reuters) - The rupee weakened on Monday after government sources told Reuters that the government is not considering issuing a sovereign bond to offshore investors right now, dampening hopes for large dollar fund inflows which could have changed the rupee's fortune.

The government instead aims to attract dollar flows from non-resident citizens to support the rupee or it could also allow some companies to raise debt abroad, two senior government officials familiar with the matter told Reuters on Monday.

The officials also said the Reserve Bank of India (RBI) could look to raise the key policy rate if the rupee once again weakens toward 61-62 levels.

"The sovereign bond issue not being an option and the repo rate hike are both negatives for the rupee," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.

"I expect the rupee to hold in the recent 59-60 per dollar band this week."

Traders broadly expect the central bank to sell dollars via state-run banks if the rupee tries to breach the 60 per dollar mark, they said.

The partially convertible rupee closed at 59.72/73 per dollar compared with 59.35/36 on Friday.

Traders said the larger impact was seen on the onshore dollar forward premiums, which shot up post the comments.

The 1-year onshore dollar premium rose as high as 447.25 points, its highest since August 1998 compared with its close of 430.25 points on Friday.

The rupee, which fell to a record low of 61.21 on July 8, has seen little recovery since the central bank's measures last week. Instead, the steps roiled the bond market and pushed up government borrowing costs.

In the offshore non-deliverable forwards, the one-month contract was at 60.09, while the three-month was at 60.89.

In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 59.67 with a total traded volume of $1.9 billion.

(Editing by Prateek Chatterjee)