Rupee continues to weaken, G-Sec yields move up

The rupee continued to weaken amid demand for dollar from foreign institutional investors (FIIs), who are exiting financial markets in emerging market economies, including India, to park the proceeds in safe-haven assets in advanced economies where interest rates are rising relatively faster.

Unlike the last two days, when the Reserve Bank of India (RBI) tried to counteract rupee depreciation by selling dollar, the central bank’s intervention was not felt in the market on Friday, according to forex dealers.

The rupee on Friday closed about 3 paise weaker at 77.45 to the dollar against the previous close of 77.4150. Intraday, the Indian unit tested a high and low of 77.26 and 77.48, respectively. On Thursday, the rupee had tested an all-time intraday low of 77.6250.

Galloping inflation

“The rupee has sharply depreciated against the dollar on account of galloping inflation, both in the US and domestically. Aggressive rate hikes in the US have strengthened the dollar against the basket of currencies. FII outflows in the equity may persist as normalisation of interest rates in advance economies will impact the growth outlook in emerging markets. Rupee is expected to move in the range of ₹75-78 with swings on either side,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

Meanwhile, the near eight-year high retail inflation reading of 7.79 per cent for April had its impact on the Government Securities (G-Secs) market due to fears of more rate hikes by RBI. Price of the 10-year benchmark G-Sec (coupon rate: 6.54 per cent) declined 49 paise to close at ₹94.66 (previous close: ₹95.15). Yield of this security rose about 7 basis points to close at 7.3184 per cent (7.2439 per cent).

The RBI on Friday auctioned four G-Secs (aggregating ₹33,000 crore) at higher yields, possibly indicating that it wants to go with the flow in a rising interest rate regime. For example, at the auction of the 10-year benchmark G-Sec, the cut-off yield was about 8 basis points higher at 7.3290 per cent compared to the previous close. The cut-off price was 56 paise lower at ₹94.59 as against the previous close.

Published on

May 13, 2022

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