Inflows lift rupee to 4-month high, bonds boosted

RECAP

The bond market and the rupee rallied last week, breaking major psychological barriers. While the ten-year benchmark government security touched 5.15 per cent levels, the spot rupee appreciated to a four-month high of 45.16 to a dollar.

Dealers said the rally was significant as the rupee not only crossed 45.20 levels but closed much higher.

The benchmark 10-year bond yield fell to a seven-week closing low of 5.1554 per cent from the previous day's 5.1727 per cent.

This bond's yield has fallen more than five basis points since Monday's close on buying fueled by heavy cash surpluses created by the central bank's dollar purchases.

The inflation figure (at 4.91 per cent) released by the government acted as a trigger for the bonds market, which has been eyeing this data since the middle of January, market sources added.

In fact, the data has been a dampener for the markets till last week, when the inflation started falling from 5.84 per cent to 5.32 per cent. The market was upbeat about the data as it was not only supported by base effect but by a fall in prices.

Last week, government officials reportedly affirmed that the inflation rate will be revised within a 5.0-5.5 per cent range as against the earlier projection of 4.0-4.5 per cent.

On the other hand, robust foreign exchange inflows and relatively small intervention by the RBI took the rupee up to a four month high of 45.16 to a dollar after opening the week at 45.23/24.

It gained nearly 0.22 per cent during the week and ended firmer than the key psychological level of 45.23 for the first time since March 10. The rupee last ended firmer on August 1, 2000 at 45.1500/1600.

The rupee has appreciated nearly one percent against the dollar so far in 2004, adding to gains of 5.2 percent last year, on the back of robust foreign investment inflows and export receipts.

Latest data from the capital market regulator showed foreign funds' purchases of local shares continued at a fast clip, with purchases in March totalling $489.2 million and taking their net investments for the year over $1.6 billion.

The central bank had kept the rupee, which is only partly convertible, on a tight leash and capped gains at around 45.23 in recent months through dollar purchases by state-run banks.

Dealers said that the action of RBI has been prompted by Bank of Japan which is understood to be out of dollar buying and is letting the yen appreciate as the growth in exports has remained strong.

Interestingly, in India as well, despite the appreciating rupee, exports have continued to grow. For quite sometime, RBI, through dollar buying by PSUs, has been supporting the spot rupee at 45.23-25 to a dollar and it has rendered the market flat for many trading sessions.

Bond prices, on the other hand, went up by 25-30 paise in the long end following the release of the inflation data.

The already upbeat sentiment on the back of abundant liquidity and deferring of the market stabilisation bonds to the new fiscal, received a shot in the arm with the falling inflation data, market dealers said.

For the entire week, while the spot rupee remained rangebound with RBI support, gilts rallied on the back of excess liquidity. With no other avenues to park funds, banks opted for gilt investments and, in the process, illiquid gilts also became active.

In fact, most banks have been reportedly shifting the illiquid stocks to the held-for-trading category so as to get a better valuation for the portfolio in the year end.

Forward premiums ruled rangebound, but positive, as they were basically a function of the RBI's intervention in the forex market.

Therefore, premiums commanded by various tenor of the forward dollars amounts to the extent of swaps done by RBI to infuse cash dollars in the market and buy it back at a future date. Thereby it creates paying pressure in the market.