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Rupee gains most in 5 years, aided by a sharp correction in crude prices

Reflecting the change in the level of fiscal stress, the 10-year bond yields also fell 12 basis points (bps) to close at 7.35 per cent, an eight-month low

Anup Roy  |  Mumbai 

rupee, currency

The Indian rupee gained the most in five years, aided by a sharp correction in crude prices.

The Indian rupee ended at 70.45 a dollar, gaining 1.57 per cent intra-day, its biggest one-day gain since September 19, 2013. The rupee had closed at 71.55 a dollar on Monday. The present level though, is at a two-week high.

The gain was caused by a 4 per cent fall in prices to $57.20 a barrel. The crude were at $86 a barrel even in September. The sharp correction in may have saved about $30 billion in import cost for India, considering the country imports 1.2 billion barrels of oil.

“The rupee responded to oil prices, but there was also some heavy dollar inflow,” said a senior dealer with a foreign bank.

Nationalised banks were seen buying dollars, and they may have bought on behalf of the central bank as well.

As the oil bill falls, the chances of fiscal deficit widening reduce. This is certainly reflected in the trade data for November, showing trade deficit narrowing to $16.7 billion, from $17.1 billion in October. This would allow the government to stick to its borrowing plan.

ALSO READ: Rupee logs best day in over 5 yrs on crude slide, rises 112 paise to 70.44

Reflecting the change in the level of fiscal stress, the 10-year bond yields also fell 12 basis points (bps) to close at 7.35 per cent, an eight-month low.

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The chances of rate cuts have increased with the new of India (RBI) governor in place, and with favourable numbers. Policy rate changes, though, impact short-term rates much more sharply than longer-term rates, showed an interesting staff study of the

“Policy rate is found to be a key driver of bond yields of short-term securities, and the impact on yields weakens as the tenure of the bonds increases,” said the study by Muneesh Kapur, Joice John, and Pratik Mitra.


ALSO READ: Rupee opens 23 paise higher at 71.33 against US dollar

“Estimates in this study suggest that an increase of 100 bps in the policy rate could, over time, lead to an increase of around 95 bps in yields of 15-91 days residual maturity treasury bills and around 20 bps for 10-year government securities,” the researchers said in their paper.

The size of the government’s borrowing programme, foreign portfolio investments in the domestic bond market, and foreign bond yields are also found to move domestic government bond yields, although the impact of these factors differs across maturities, the study said.

First Published: Tue, December 18 2018. 20:37 IST
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