With the Reserve Bank of India slashing the repo rate by a good 100 basis points and the government auction getting cancelled, bond yields witnessed a sharp fall. Call money rates also saw a drastic fall signifying adequate liquidity in the banking system. Rupee ended at 48.97/98 against the dollar, 0.2% weaker than 48.88/89 at close on Friday. During the day, it fell to 49.20 against the dollar.
The Indian currency weakened on Monday as there was a large dollar demand from importers offsetting gains in the local share market as a cut in the central bank’s key lending rate provided only a small breather.
“We expect the weakness in rupee to continue on account of lack of inflows. We see rupee in the range of 48.50-49.50 in the short term. As long as inflows are weak, the bearishness in rupee will continue,” said V Rajagopal, head of currency trading at Kotak Mahindra Bank.
On Monday, the central bank slashed the repo rate by 100 bps from 9% to 8%, in a bid to alleviate pressures caused by the global financial turmoil to maintain financial stability. Recently, the central bank had slashed the cash reserve ratio by 250 bps.
to pump in almost Rs 1 lakh crore into the system.
On Monday, the 13-year bond yield ended at 7.70%, after touching an intra-day low of 7.65%, much below Friday’s close of 8.07%. Trade in the benchmark 10-year bond was suspended for semi-annual interest payments. It had closed at 7.72% on Friday. Total volumes stood at Rs 4,900 crore.
Call money rates ended at 5.50/5.75%, as liquidity in the system improved drastically. Traders anticipate volumes to remain on the lower side on Tuesday on account of a nationwide strike planned by central bank employees, demanding higher pensions.
“On Wednesday, we expect the 10-year benchmark paper to touch at 7.40%. Demand will be heavy on this paper, once it opens, since it wasn’t traded after Friday. Liquidity pressures have eased and we expect the yields to slide now,” said NS Venkatesh, managing director and chief executive officer with IDBI Gilts Ltd.
The central bank also decided to cancel a bond auction worth Rs 10,000 crore on Monday, following the rate cut to enable investors to re-bid the auction at a later date. They had planned to sell a new six-year bond for Rs 6,000 crore and the 2032 bonds for Rs 4,000 crore.
Going forward, Venkatesh also expects call rates to contract to 5.50/6%. “Banks now have sufficient liquidity. There is also no need for a cut in SLR.
On Monday, banks borrowed only Rs 2,800 crore from RBI’s twin repo tenders compared with Rs 7,350 crore on Friday.
On the other hand, they parked Rs 27,695 crore at RBI’s reverse repo tenders versus Rs 5,715 crore on Friday.
Last Tuesday, the RBI had introduced a 14-day special repo tender, in a bid to help banks meet the liquidity requirement of mutual funds.
The central bank said they would provide a sum of Rs 20,000 crore through these special daily repo auctions.
Till date, banks have borrowed only Rs 7,005 crore through this window.
“Today, mutual funds are not facing huge redemption pressure as liquidity pressures have eased,” said a private dealer.
On Monday, November-maturity CDs of state-owned banks were dealt at 11.50% after the repo rate cut, as against 12.25-12.75% on Friday.
At the same time, state-owned banks’ December-maturity CDs were dealt at 12%, as against 12.25-13%.