Gilts fall on rate hike expectation, rupee bullish

RECAP

Gilt prices saw a fall during the last week following a base rate hike by the Bank of England which fuelled the feeling that sooner or later rates are going to firm up.

Some of the foreign banks have already factored in a 50 bps hike in Fed rates, even though Fed itself is yet to hike the rates.

However, the last speech by the Federal Reserve governor Alan Greenspan was construed as a small step towards hardening of interest rates.

Secondly, inflation figure flat at 6.12 per cent was the last nail in the coffin last week. Prices fell by 50-60 paise despite repeated assurances from the regulators and ministry inflation continued to rule firm.

In fact another factor that might lead to cautiousness on part of the market players is base rate hike in some of the developed economies.

While the Bank of England has hiked rates by 25 basis points, from 3.75 per cent to 4 per cent, few weeks back Bank of New Zealand had effected a similar rise.

The retail market data to be released for the US economy will hold the key for indications for a change in the Fed rate. With no demand for gilts, repos have turned as the only viable option for investment.

All said and done, market was seen jittery. Though fundamentals look favourable, some banks harbour the feeling that investments could not be made heavily into gilts to build large positions as they are not sure if the interest rates could fall further for better profit selling.

This, coupled with the fact that with the credit offtake starting slowly, liquidity could not be pressured much by building long-term positions.

The Indian rupee, on the other hand, opened stronger on Monday at 45.2650/27 levels compared with its previous close of 45.2750/28.

The upbeat and optimistic sentiment on the Rupee front is well reflected in continued inflows into the Indian economy leading to the forex reserves going up by $761 million in the week ended January 30.

Forex reserves stand at a record high of $104.998 billion now. The rupee is likely to continue with its bullish tone on the back of bunched up weekend inflows and the sentiment would be further supported by the greenback's weakness overseas after G7 meet, where no attempt was made to rescue a weakening dollar.

However, now the central bank's role becomes important in deciding on how much the rupee is allowed to appreciate.

Forward premiums, on the other hand, hovered low through out the week due to demand for forward dollars by some large state-owned banks in the near tenures due to expectation that cash dollar shortage may surface again.

Nonetheless, outlook on the rupee remains bullish and global weakness of the dollar may also support the rupee. Friday saw a volatile rupee with spot rupee opening at 45.23/24 and reaching highs of 45.22 and lows of 45.27.