Rupee slumps, call rates stable, gilt yields slip

RECAP

The rupee fell by a whopping 11 paise against the US dollar on the inter-bank foreign exchange (forex) last week due to fag-end inflows of dollars through corporates along with good buying by banks.

The Indian unit resumed weak at Rs 45.64/65 per dollar due to heavy month-end dollar demand amidst renewed fears of a cash dollar shortage. However, the rupee rallied by Tuesday on late round of heavy exporter dollar sales and touched Rs 45.56/57 per dollar.

The firm trend was shortlived as fresh inflows of dollars through corporates, along with spot buying by banks at the fag-end, pushed the Indian unit sharply down by 10 paise to end at Rs 45.69/70 per dollar, sharply lower than the previous week's close of Rs 45.5800/5880 per dollar.

Forwards fell as a shortage of dollars in the spot market prompted some banks to transact buy-sell swaps. The absence of RBI to balance out the market also added to bearish sentiment for the forwards.

Although, persistent foreign fund inflows and export remittances continued to give the rupee firm underlying support, renewed dollar demand from corporates and importers exerted moderate pressure on the rupee, dealers said.

Meanwhile, call rates remand soft for most of the week, closing in the 4.25-4.50 per cent band, unchanged from the previous week's levels.

Government bonds ended lower, dragged down by profit booking. The underlying sentiment was, however, firm, dealers said. The benchmark 10-year bond ended Monday at 5.118 per cent as against the previous week's close of 5.1125 per cent.

Subsequently, government bond yields eased, but the price rise was stunted by concerns over fresh issues next week to absorb huge fund inflows, dealers said.

It is expected that pension funds, which will receive nearly Rs 8,000 crore this year as interest on a state-run special deposit scheme (SDS), will park the funds in federal bonds, state government loans and bonds of public sector companies.

Meanwhile, in a bid to absorb the rising liquidity in the bond market, the Reserve Bank of India (RBI) on Tuesday announced an open market operation (OMO) of the 5.87 per cent 2002 paper for Rs 5,000 crore, to be held on January 7. Similarly, the RBI announced that it will auction the 7.38 per cent 2015 government bonds for Rs 5,000 crore on January 6.

A statement from the finance ministry said the government stock would be sold through a price-based auction using the multiple price method. The auction is in accordance with the RBI's calendar for G-secs during the second half of 2003-04.

Liquidity in January is expected to grow, due to SDS inflows of Rs 8,000 crore to provident funds. In anticipation of the demand, banks and primary dealers built up their portfolio to be able to sell bonds to PFs next month at a gain.

In the following sessions, gilt yields inched up after data showed that the economy expanded at a high rate of 8.4 per cent in the July-September quarter compared with 5.2 per cent in the year-ago period. The benchmark 10-year 7.27 per cent bond rose to 5.12 per cent from the previous close of 5.10 per cent.

Medium-term bonds, however, traded actively but they also witnessed a fall of 5-10 paise. The market recovered slightly but concern over the rise in inflation continued to influence market players due to hike in petrol and diesel prices.