Gilts jump as surge in rupee eases inflation fears

The rupee rose to 81.22 per dollar, its highest level against the greenback since Sep 30, and closed at a near six-week high of 81.43

FPJ Web DeskUpdated: Saturday, November 12, 2022, 01:15 PM IST
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Mumbai: Government bond prices ended higher today tracking a surge in the rupee against the dollar for the second straight trading session. With this, the burden of imported inflation is likely to decrease significantly, dealers said.

The 10-year benchmark 7.26%, 2032 bond closed at 99.11 rupees, or 7.39% yield, as against 98.79 rupees, or 7.43% yield, on Monday. Tuesday, the markets were closed on account of Guru Nanak Jayanti.

The rupee rose to 81.22 per dollar, its highest level against the greenback since Sep 30, and closed at a near six-week high of 81.43.

The Indian unit was sharply up as banks sold dollars for foreign portfolio inflows into Indian equities and due to weakness in the greenback on expectations of slower rate hikes by the US Federal Reserve, dealers said.

"There is a lack of selling triggers, and you can't convince me to sell when the rupee is gaining," a dealer at a private bank said. "In such a situation, and with robust foreign exchange flows seen coming in, buying under 7.40% is possible."

As an import-dependent country, weakness in the rupee during the year has led to greater inflationary pressures from the international market to the domestic economy, dealers said.

Lacking triggers on the domestic front, traders are keenly watching the results of the US mid-term elections, dealers said.

Republican victories in the House of Representatives, and possibly the Senate, will curtail US President Joe Biden's ability to pursue expansive fiscal policy plans, potentially pulling down US Treasury yields, dealers said.

During the day, some traders booked profit after the sharp rise since Monday, dealers said. At the day's high, the 10-year benchmark 7.26%, 2032 bond was 63 paise above Friday's close.

Traders had also placed short bets as the 10-year benchmark yield fell below the 7.40% mark, making the bond go off-highs for some time, dealers said.

Investors were wary of stocking up on gilts after the sharp rise in prices, expecting to pick up bonds at higher yields at the 280-bln-rupee weekly gilt auction on Friday, dealers said.

However, with the debt sale two days away, sustained buying interest from traders due to the rupee's gains buoyed gilt prices. Long-term gilts were particularly in favour taking cues from a slump in the five-year overnight indexed swap rate, dealers said.

The five-year OIS rate ended 10 basis points lower today at 6.83%.

"The auction is the only domestic factor, and that is not prominent enough," a dealer at a state-owned bank said. "There will be some caution ahead of the (US election) results."

According to data on RBI's Negotiated Dealing System - Order Matching platform, the market-wide turnover was at 254.35 bln rupees, compared with 204.00 bln rupees on Monday.

Meanwhile, 6.15 bln rupees of trade was settled with the pilot digital rupee in 68 deals today, against 5.30 bln rupees in 69 deals on Monday.

With inputs from Agencies

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