Rupee depreciates on weak equity market

MONEY MARKET ROUND-UP

Rupee: Declining premia
The spot rupee opened at 39.36/37 and appreciated to 39.33. It fell to a low of 39.55 following heavy correction in the equity market.

The equity market fell by 2100 points, but recovered to close 1400 points down, following bearish outlook in the global markets and heavy selling both by the foreign institutional investors and domestic institutions.

Most of the foreign banks were seen buying dollars for their custodian clients and this put pressure on the rupee. According to dealers, the spot rupee may have depreciated further but for the dollar selling by the exporters at every dip in the rupee dollar exchange rate.

Since the rupee was depreciating, RBI did not sell buy swaps. Thus the annualised premia for the six month and one year forward dollars closed at 2.07 per cent and 1.68 per cent as against a high of 2.14 per cent and 1.85 per cent seen last week.

Last week, sell buy swaps kept the rupee premia high. The sell buy swaps are contracted to postpone the immediate infusion of rupee liquidity into the system throughout dollar purchases.

The dollars are bought in spot market and sold in the forward market to be bought back at a future date. In the process, the central bank pays rupees to book these forward dollars and this pushes up the interest rates in rupees for booking forward dollars.

Liquidity: Situation of abundance
Liquidity remained comfortable in the system with call rates closing at 5 per cent even as it went up to a high of 7.75 per cent.

Call rates at which the banks lend and borrow funds for daily requirement fell to a low of 5 per cent to close. Collateralised lending and borrowing rate further fell to a low of 3.5 per cent since most mutual funds are flush with funds, said a dealer.

Last week, the call rates went up to a high of 60 per cent due to technical snag in the RBI's payment system of real time gross settlement. Further, the reporting Friday of the fortnight aggravated the problem.

While the RBI absorbed around Rs 595 crore from the market under reverse repo, it infused around Rs 2000 crore through repo. The RBI infuses liquidity through purchase of securities for a short period of one to three days under repo, while it absorbs funds through sale of securities under reverse repo.

G-sec: Easing sentiment
The market opened bearish on fears of a liquidity crunch following the crisis on Friday. However with call rates ruling around 6/6.5 per cent throughout the day, the market sentiment eased.

Buying emerged when the RBI said that it would take cues from the global developments before deciding on its policy moves.

According to dealers, RBI could consider cutting the rates. The prices in the long term papers moved by 15-20 paise while the medium term segment witnessed prices firming up by 10-15 paise. The short term papers remained flat. The yield on the ten year paper closed at 7.54 per cent.

OIS: Sideways moves
The overnight interest rate swap market was flat due to uncertainty over the fund positions and bearish outlook on liquidity.

Following the fund crisis last Friday, the banks were cautious about contracting deals in OIS. Yields on the OIS remained rangebound since the outlook on interest rate is not certain in shorter term even if the general perception is that of moderation in the medium term.

Overnight interest rate swap market is a derivative product based on the underlying of interest rate on the government securities.

The corporate bond market witnessed firming up of the yields on the short term papers such as commercial papers and certificate of deposits. The yield on the one year CD rose to 9 per cent as against 8.65-8.75 per cent last week. Punjab National Bank scouted for one year funds at 9 per cent, but quotes were available at 9.05 per cent said a dealer.

There were no primary issues in the longer end of the yield curve.

International market: Dollar gains
The dollar rose against major currencies since the entire market was rushing to buy dollars. Yen fell against the dollar at $105.93 ($107.79) and the euro was $1.4489 ($1.4866). The pound ruled around $1.9477 ($1.9628).