Gilts slide, rupee flat, forwards discounted

RECAP

Government security prices continued to fall last week as investors, particularly foreign and private sector banks, went on a selling spree after they saw an upturn in the yields ahead.

Prices sank by 30-35 paise on a daily basis. The yield on the ten-year benchmark paper, 7.37 per cent 2013, rose to 5.32 per cent in last week from 5.15 per cent the week before.

The rally in the gilt yield continued amid concerns over inflation and reports that the government was planning to set up a Rs 40,000 crore market stabilisation bond fund to sterilise the excess liquidity created by the rising foreign exchange inflows.

Along with banks, mutual funds continued to sell government securities heavily, after facing redemption pressure from investors. "There was major profit-booking towards the end of trading days," said dealers.

Traders were warily eyeing inflation data due around noon on Friday. A higher-than-expected rise in the inflation rate added more pressure on gilt prices, the dealers said.

As per the data for the week ended January 31, year-on-year inflation rate, based on wholesale prices, was 5.8 per cent, which was still above the Reserve Bank of India's (RBI's) year-end target of 4-4.5 per cent.

The central bank had in December 2003 proposed issuing market stabilisation bonds. The government is yet to give a formal go ahead for this. market stabilisation bonds will be launched to lower the dependence of the apex bank on its own stock of government securities.

The government's liability will be limited to the interest payable on these bonds. The stabilisation fund will be created out of the government's public account.

However, on Saturday, gilt prices recovered amid heavy buying by mutual funds and banks, who preferred to buy long-term papers at rock-bottom prices.

In the currency market, the rupee started on a weak note as public sector banks bought dollars on behalf of the central bank for facilitating the government's prepayment of forex debt to Asian Development Bank. Last week the spot rupee went below the 45.23 mark and for most part of the week it ended flat against the dollar.

Despite Monday's weakness, dealers said the Indian currency has gained 0.7 per cent against the greenback so far in 2004, mainly on foreign fund inflows into domestic assets and robust trade remittances.

Premiums on forward dollars, especially those of up to 5-months, traded at discount during the beginning of the week as the market witnessed shortage of cash dollars due to demand from the RBI.

By the end of last week, the premiums recovered as exporters re-booked forward contracts. These exporters had cancelled their previous contracts when the premiums came off to realise profits.

With the premiums again on the climb, the exporters will be re-booking at higher levels this week. This might put some pressure on the forward dollars which are likely to come back to trade at discount.