CMP takes toll on rupee, bonds follow suit

RECAP

The financial markets started on a weak note last week with a fall in bond prices and the spot rupee losing by 10-15 paise per day. While exporters' dollar sales and import demand kept the forex market on the tenterhook, uncertain interest rate outlook reduced buying in the securities market.

As the week progressed, higher inflation and crashing equity prices further depreciated the spot rupee and gilt yields firmed up with the 10-year benchmark paper touching 5.25 per cent.

Perceiving the common minimum programme (CMP) announced by the government not market friendly, both the foreign exchange as well as the government securities markets fell.

The spot rupee lost 20 paise on Friday and touched a low of 45.60 after opening at 45.38-45.40 to a dollar on aggressive dollar buying by banks which were facing month-end oil payments.

However, the intervention by the Reserve Bank of India (RBI) in the spot as well as cash dollar markets helped the rupee to close at 45.48-45.50 to a dollar, said dealers.

The move also helped the cash dollar to close at a discount to the dollar, thus reversing the trend of cash dollar premium till now.

Anticipating a cash dollar shortage in the foreign exchange market owing to month-end oil payments, the RBI is understood to have supplied dollars directly in the cash market, according to bank dealers.

The RBI intervention in the cash market reduced the cash dollar shortage which was evident as cash dollars were available at a discount to dollars valued for tomorrow(cash-tom) unlike the huge premiums charged usually during month-ends.

Cash-tom closed at a premium of 2.81 per cent as against a discount of 1.81 per cent. While the RBI intervention is valued approximately at $200-300 million, the spot market is expected to have witnessed an inflow of dollars amounting to around $50-100 million, said dealers.

The government bond market fell across maturities as banks preferred to sell to remain fund-rich as most of the funds were parked at the RBI's repo facility.

While bond prices fell by 50-60 paise across maturities, the 10-year benchmark 7.37 per cent 2014 paper closed at 5.25 per cent as against a close of 5.21 per cent on Thursday.

Interbank call rates, which used to remain soft below 4.5 per cent for a long time, shot up to 6.25 per cent due to the demand for funds.

RBI, at the repo auction, absorbs liquidity for seven days from the market and returns the money at an interest rate of 4.5 per cent.

Dealers said part of the demand was from banks to buy dollars for month-end oil payments. The inflation rate, which figured higher at 4.67 per cent as against 4.20 per cent last week, acted as an additional dampener to the market.