Mumbai, Oct 3: The Reserve Bank of India (RBI) lowered yields at its repo auctions on Tuesday for the first time in three weeks as the rupee showed signs of stabilising against the dollar, dealers said. The central bank reduced the repo rate - the benchmark for short-term interest rates - by 25 basis points to 9.75 per cent. Dollar inflows from a foreign currency deposit issue, likely to be floated later this month by State Bank of India (SBI), SBI.BO., is set to keep the rupee stable, which will give the RBI more room to lower short term interest rates, dealers said.SBI expects the issue, which is targeting non-resident Indians, to raise at least $2 billion, but there is speculation that it may raise twice as much. The central bank encouraged SBI to come out with the foreign currency deposit issue in order to bolster the country's foreign exchange reserves and help meet a swelling oil import bill. The central bank hiked short-term rates and introduced special repos to support the rupee when it fell sharply in July and August, but had begun lowering rates again until a fresh bout of rupee weakness in mid-September stalled the move lower. At the three-day special repo, the RBI accepted 21 bids for Rs 92.75 billion while it accepted bids worth Rs 25.05 billion at the regular one-day repo auctions.
The additional special repo rate is now down 575 basis points from a peak of 15.50 per cent in August. After the rate cuts, the Union government bond prices rose by 10-12 paise (0.10-0.12 rupees) as dealers said pressure on interest rates in the immediate future had eased. Traders interpreted the repo rate cuts as fresh signs of the central bank's growing comfort with the rupee's short-term stability and they were expecting RBI to lower repo rates further. "I expect the central bank to move cautiously and lower the repo rates to nine per cent by the end of the week," Mr Nitin Jain, head of fixed income at ICICI-Securities said. "Although there is no immediate rally in bond prices the market feels that interest rates may ease in the short term as the rupee is likely to remain stable on inflows from the SBI deposit issue."
The rupee, convertible only on the current account, has eased around one per cent in the past three weeks due to concerns that high global oil prices will be a strain on the economy. The currency was was quoted steady at 46.04/0525 in afternoon trade after it opened weaker at 46.08/11 to a dollar closing Friday at 46.03/04.
It has depreciated by around six per cent against the dollar since the beginning of the year, but is holding its ground on an inflation adjusted, trade-weighted basis due to the sharp falls in European currencies against the dollar this year.
Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.