G-Sec rally, Re tumbles on fears of rate hike pause

BL Mumbai Bureau | | Updated on: Aug 04, 2022

Rupee sheds 30 paise against dollar, ahead of MPC’s call today

Reported comments by an unnamed central bank official that there may be a pause in rate hikes after Friday’s monetary policy review triggered a rally in the Government Securities (G-Secs) market, but had a negative impact on the rupee, which weakened further.

A wire agency on Thursday reported about the possibility of the rate-setting monetary policy committee hitting the pause button after the forthcoming policy review as retail inflation appears to have more or less peaked.

Price of the 10-year benchmark G-Sec (coupon rate: 6.54 per cent) jumped 56 paise to close at ₹95.8125 (₹95.2525). Yield of this paper tumbled about 9 basis points to close at 7.1566 per cent (7.2416 per cent).

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

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, observed that a news report, quoting central bank sources, indicated that there may be a pause after Friday’s expected repo rate hike.

“The market rallied immediately after this news report. But central bank officials are believed to have denied this. However, the market did not correct even after this clarification,” he said.

Price of the 14-year G-Sec (coupon rate: 7.54 per cent), which is the second most liquid paper after the 10-year paper, surged 67 paise to close at ₹101.42 (₹100.75). Yield of this paper fell about 8 basis points to close at 7.3724 per cent (7.4502 per cent).

Forex market dealers, however, were not amused by the comments attributed to central bank sources.

They feared that a pause in rate hikes could widen the interest rate differential between India and overseas (advanced economy) markets, leading to dollar outflows from the country. This can weaken the rupee and have ramifications on the inflation front.

Rupee weakens

The rupee opened about 7 paise weaker at 79.23 per dollar. The intraday high and low for the rupee was 79.23 and 79.85, respectively. It closed at 79.4650, down 30 paise as compared to the previous close of 79.1650.

The rupee weakened as foreign banks reportedly bought dollars on behalf of Uber for repatriating the sale proceeds ($390 million) of its divestment in Zomato. Demand from oil marketing companies too weighed down the Indian unit.

RBI is believed to have sold dollars in the non-deliverable forward and futures market to stem the depreciation in the rupee, a private sector bank dealer said.

Published on August 04, 2022
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