This is a surprise move by RBI and bond markets are completely caught offguard. Yields will spike sharply and the market may eventually settle 10 basis points higher from todays close, a fund manager said. The yield on the benchmark 10-year federal bond ended at 8% on Friday, higher than the previous close of 7.96%, as tight cash conditions forced banks to sell debt to raise funds for meeting financial year-end statutory requirements.
The federal government also unveiled on Friday a bigger-than-expected borrowing plan for April-September, which would weigh on sentiment, traders said. Overnight rates spiked to 80% in early deals, their highest in more than 10 years. They closed at 45-50%, much higher than 6-7% when cash is adequate.
The RBI through its liquidity adjustment facility (LAF) absorbed Rs 1765 crore through reverse repo auction and injected Rs 30,650 crore through repo auction into the banking system on Friday. The rupee ran out of steam on Friday after partly recovering from its largest single-day percentage fall in nearly nine years, as investors shied away from testing the central banks resolve on the last trading day of the financial year.
The rupee surged in early trade but ran out of momentum to end at 43.45/48 per dollar, recouping some of its losses from Thursdays close of 43.770/785 when it fell 1.7% on suspected RBI intervention. Traders expect that the monetary measures would strengthen the local currency. We should see dollars flow into the market as a result of the rate hike, which will push the rupee higher, though there should be good support for the dollar around 43.25-30, said the chief dealer at a private bank. What remains to be seen is the central banks stance.
April may not have the strong inflows we saw in March, which will console the RBI, and perhaps they will keep their hands off, he added. In the forward market the six-month premium inched upto 4.40% as against its previous close at 4.05% while the twelve month premium also moved upto 3.67% from its previous close at 4.46%.