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Friday, May 27, 2022
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    Rupee falls as oil and US yields rise; gilts fall after Friday’s auction devolvement.

    On Monday, the rupee fell against the US dollar as banks bought the greenback on behalf of importers as global crude oil NSE 2.67 percent prices rose. Dealers claimed that a spike in US Treasury yields and the dollar index had also soured their outlook on the Indian currency.


    The partially convertible rupee finished at 74.2500 per US dollar, down from the previous closing of 74.1500 per US dollar. During the day, the Indian currency fluctuated between 74.1300 and 74.3600 per dollar.


    On Friday, crude oil futures for February delivery surged more than 2% on the New York Mercantile Exchange, while Brent crude, the global benchmark, rose to its highest level in more than three years, as investors predicted supply will remain tight due to major producers’ limited output.


    Since India is the world’s third-largest importer and consumer of crude oil, rising prices have a negative impact on the country’s current account and inflation forecast. As investors braced for tighter monetary policy in the world’s largest economy, the yield on the 10-year US Treasury note surged to within striking distance of the psychologically critical 1.80% mark.


    To address rising inflation, the Federal Reserve has indicated that interest rates may be raised three times in 2022. Higher interest rates in the United States tend to reduce the appeal of assets in riskier emerging markets like India.


    In the last three months of 2022, foreign portfolio investors went on a savage selling binge in Indian equities, citing Fed rhetoric indicating a faster pace of interest rate hikes in the US. While the selling pressure subsided in January, currency traders were nonetheless nervous ahead of the Federal Reserve’s next policy statement on January 26.


    “Dollar yields and crude oil prices have risen, there is a huge event next week in the form of the Fed, and there is a clear feeling among some quarters that the rupee may be in for some correction after the increase we witnessed in mid-December,” a foreign bank trader said on condition of anonymity. “When the rupee rose past 74/$1, the RBI intervened on the opposite side (buying dollars), and we believe the range would be within 74.25-74.50/$1 before the US policy pronouncement,” he said.


    Government bonds declined in value, with the yield on the most liquid paper, the 6.10 percent 2031 bond, rising six basis points to 6.64 percent. On Friday, the new 10-year benchmark 6.54 percent 2032 paper, which was auctioned for the first time, closed at 6.62 percent. Bond yields and prices move in opposite directions.


    Due to the RBI’s frequent sales of gilts in the secondary market, sentiment in the bond market has deteriorated recently. The central bank’s sales are adding to the market’s already substantial supply burden.
    The RBI has been forced to delegate major amounts of weekly debt sales on the accounts of principal dealers to convey its concern with increasing yields, indicating weak bond demand.

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