Rupee weakens a tad against dollar

The rupee closed at a record low of 77.73 per dollar on Wednesday even as government securities (G-Sec) prices rallied on short-covering in the backdrop of the 50 basis points hike in repo rate.

The rupee’s previous closing low was 77.7250 per dollar on May 19, 2022.

The rupee weakened a tad to close two paise lower against the previous day’s close of 77.71, amid the dollar ruling strong, Brent crude oil prices hovering at $122 a barrel and demand for greenback coming in from importers and foreign, who are cutting investment positions in emerging markets, including India.

The rupee tested an intraday low of 77.7850 per dollar but pulled back as state-owned banks sold dollars on behalf of RBI.

Dharmakirti Joshi, Chief Economist, Crisil, said the RBI’s policy tightening is warranted to reduce pressure on the rupee from widening the current account deficit (CAD) and stem foreign portfolio outflows.

So far, the rupee has weakened 4.3 per cent since the start of 2022, compared with 12.9 per cent during the ‘taper tantrum’ of 2013, he added.

IFA Global, in a report, said the gains in the (USD-INR) pair remained capped as investors remained concerned over rising crude prices, and sustained foreign capital outflows.

“With little in the way of US economic data today and with Federal Reserve speakers quiet ahead of next week’s monetary policy meeting, investors were seen focusing on expected central bank action,” per the report.

G-Sec prices

Meanwhile, price of the benchmark 10-year Government Security (coupon rate: 6.54 per cent) closed up 16 paise at ₹93.54 (previous close: ₹93.38), with yield thawing about 2 basis points to close at 7.4939 per cent (7.5184 per cent).

Bond yields and price are inversely co-related and move in opposite directions.

Price of the four-year Government Security (coupon rate: 5.74 per cent) closed up about 35 paise at ₹94.6375 (previous close: ₹94.29), with yield thawing about 10 basis points to close at 7.1719 per cent (7.2673 per cent).

Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, believes that the 10-year benchmark yields are likely to be capped at 7.50 per cent, even assuming a 175 basis point spread over our peak repo rate at 5.75 per cent.

“This is because, term premium is likely to be 50 basis points, factoring in a further market adjustment of 50 basis points over and above 5.75 per cent as an insurance rate hike and an additional 75 basis points because of supply overhang.

“This makes the total spread of 175 basis points over 5.75 per cent. Interestingly, the pre pandemic spread was around 135 basis points,” he said.

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