Bond yields ease in thin volume

Mumbai, Mar 29 | Updated: Mar 30 2007, 06:59am hrs
The bond yields slipped on Thursday as cash conditions improved, but volume was light with traders awaiting inflation data and details of the governments bond sale calendar. The yield on the 10-year federal bond ended at 7.97%, lower than 7.99% on Wednesday.

Prices are just a tad higher and sentiment very lackluster before the financial-year ending. The upcoming data will provide some fresh triggers, said Manoj Swain, head of trading at Standard Chartered Bank, India.

The overnight cash rates inched higher to 10-11%. The Reserve Bank of India through its liquidity adjustment facility (LAF) absorbed just Rs 40 crore through reverse repo auction and injected Rs 17,865 crore (Rs 27,395 crore on Wednesday) through repo auction into the banking system on Thursday.

The rupee fell 1.7% on Thursday, posting its biggest single-day percentage loss in nearly nine years, on suspected RBI intervention and short-covering of dollar positions after the rupee had risen to a 7-year high on Wednesday.

Traders said month end dollar buying by oil companies also pushed the rupee to its lowest close in more than a week. The rupee ended at 43.770/785 per dollar, weaker than Wednesdays close of 43.04/06. It was the biggest percentage drop since May 14, 1998, when it had dropped 1.9%.

The central bank aggressively sold rupees between 43.30-50, which suggests the rally is over, said a dealer with a private bank. Everyone was expecting a correction to happen, though its speed was a little surprising, added the dealer.

Traders also said a shift in the settlement date for three-day forward contracts struck on Wednesday due to the end of the fiscal year was another reason behind the fall. The premium was built into todays rate as there is no settlement of currency deals on April 2 because of year-end account closing for banks, a foreign bank trader said.

Standard Chartered said that while the rupees near-term strength may persist, it would fall to 45.50 by the end of June.

The excessive strength in the rupee has been caused by a liquidity squeeze... as government expenditure seeps back into the system, liquidity is unlikely to tighten much further, it said in a note on Thursday.

Finally despite the fact that the RBI has so far tolerated rupee appreciation, intervention is still possible, it said. In the forward market the six-month premium slipped to 4.05% as against its previous close at 5.31%, while the twelve month premium also moved down to 3.46% from its previous close at 4.04%.