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The rupee is expected to be volatile this week, ahead of the Budget to be announced on Thursday. According to currency dealers, the bias is towards weakening for the rupee, as dollar demand is seen continuing.
The rupee ended stable at 59.74 a dollar on Friday, compared with the previous close. On Friday, the rupee had posted its biggest weekly gain in a month on strong dollar inflows though it had ended stable due to intervention by the Reserve Bank of India (RBI) through state-run banks.
"The rupee might trade in the range of 59.50 to 60.25 a dollar," said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai.
The government bond yields, on the other hand, are seen rising as the Street is expecting additional market borrowings by the government. According to the Street, a borrowing in excess of Rs 20,000 crore will result in yields rising sharply.
The yield on the 10-year benchmark bond ended stable at 8.66 per cent on Friday as caution set in ahead of Budget.
"The market has factored in additional government borrowing of about Rs 20,000 crore. There are also expectations that a new 10-year bond may be auctioned," said Siddharth Shah, vice-president, STCI Primary Dealer.
According to bond traders, a market borrowing above Rs 20,000 crore would result in a sharp rise in bond yields. However, the yields could soften if RBI auctions a new 10-year bond. This is because the coupon rate on the new bond might be about 20-30 basis points lower than the yield on the current 10-year bond.
Bond traders see the yield on the existing 10-year bond trading in the range of 8.60-8.75 per cent this week. According to bond traders, an additional market borrowing above Rs 20,000 crore can even result in the yield touching 8.80 per cent.
The current gross and net government borrowing for this financial year is pegged at Rs 5.97 lakh crore and Rs 4.57 lakh crore respectively.
