Rupee defence drives up government borrowing costs

MUMBAI Sat Jul 20, 2013 3:38am IST

1 of 2. Foreign currency traders work inside a trading firm behind the signs of various world currencies, in Mumbai May 24, 2012.

Credit: Reuters/Vivek Prakash/Files

Related Topics

Stocks

   
Kishore Pandey, 82, lies on a bed as his daughter, Usha Tiwari, holds him and a priest stands by them (L) at Mukti Bhavan (Salvation House) in Varanasi, in the northern Indian state of Uttar Pradesh, June 19, 2014. REUTERS/Danish Siddiqui

Waiting to die at Salvation House

The city of Varanasi is Hinduism's holiest city and many Hindus believe that dying there and having their remains scattered in the Ganges allows their soul to escape a cycle of death and rebirth.  Slideshow 

MUMBAI (Reuters) - India's measures to protect its currency sent government borrowing costs sharply higher at a bond auction on Friday and dealers said the Reserve Bank of India (RBI) appeared to have intervened anew in the forex market in support of the rupee.

Earlier, the embattled currency fell close to where it had been before a dramatic rescue mission by the RBI late on Monday, which sent bond yields surging and crimped the growth outlook for Asia's third largest economy.

India's benchmark 10-year bond ended its worst week in four-and-a-half years, with the yield rising 40 basis points, disrupting government debt sales and undermining central bank efforts to mop up liquidity to make it harder to speculate against the rupee.

That in turn fuelled expectations of further measures to generate demand for the rupee, such as increasing the level of reserves banks must hold as cash or issuing offshore bonds.

"Nobody really expects them to roll back these measures. The issue is whether they do anything further," said Hitendra Dave, head of global markets at HSBC India.

Prime Minister Manmohan Singh said on Friday the steps were temporary and did not signal a rise in long-term interest rates.

"Once the short-term pressures have been contained, as I expect they will be, the Reserve Bank can even consider reversing these measures," Singh said, though he conceded the government's forecast of 6.5 percent economic growth in the fiscal year to March 2014 was unlikely to be met.

However, some economists say the central bank's efforts increase the risk it may have to raise rates even as India's economic prospects weaken.

Private economists have been cutting their forecasts for growth, with Deutsche Bank on Friday slashing its prediction to 5 percent, matching the lowest in a Reuters poll this week.

Bond markets have been in turmoil since the RBI's extraordinary move on Monday to support the rupee by draining cash from the market and pushing up short-term interest rates. A special bond auction on Thursday fell well short of its target.

RUPEE PRESSURE

The partially convertible rupee ended at 59.35/36 per dollar, half a percent stronger on the day. Traders said the central bank appeared to have been repeating its recent late-session practice of selling dollars through state banks.

The rupee has been hit especially hard in the recent global sell-off in emerging markets because of a current account deficit that hit a record 4.8 percent of India's gross domestic product in the fiscal year that ended in March.

Investors also fret over a lack of structural reforms to attract long-term investment.

For the week, the rupee ended 0.3 percent higher after hitting a record low of 61.21 to the dollar on July 8.

"We will need dollar inflows to fund our current account deficit, otherwise we could end up with a balance of payment deficit," said Ashish Parthasarthy, treasurer at HDFC Bank, who favours an offshore bond issue to attract funds.

"Through intervention, we will end up losing reserves. By losing liquidity and tightening rates, growth will be hurt."

On Friday, the government managed to push through its scheduled sale of 150 billion rupees in bonds, with yields roughly 50 basis points higher than a week ago.

In another sign of disruption, the underwriters for Friday's bond issue demanded commissions of between 74 and 98 paise per 100 rupees of debt on issue, much higher than the usual 1 to 2 paise fee. A paise is one-hundredth of a rupee.

India grew at 5 percent in the fiscal year that ended in March, its weakest in 10 years.

India's struggle to attract big-ticket investment was underscored this week when ArcelorMittal (ISPA.AS) and POSCO (005490.KS) separately scrapped plans for multibillion dollar steel mills due to problems acquiring land and other hurdles.

The RBI's next monetary policy review is on July 30 and most economists polled this week expect it to keep the policy rate and cash reserve ratio unchanged.

On Thursday, the RBI rejected most bids in a sale of bonds designed to suck funds from the market, selling just over one-fifth of a planned $2 billion of debt as investors demanded higher yields than it would accept.

(Additional reporting by Neha Dasgupta, Manoj Kumar and Suvashree Dey Choudhury; Writing by Tony Munroe, Editing by Gareth Jones)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

India-Nepal Ties

REUTERS SHOWCASE

Tackling Food Prices

Tackling Food Prices

India to free up extra 10 million tonne wheat in open market  Full Article 

Facebook Results

Facebook Results

Facebook beats Wall Street targets, stock hits record high  Full Article 

GM Recall

GM Recall

GM recalls 717,950 vehicles in U.S., not for ignition switches  Full Article 

Hyundai Motor Results

Hyundai Motor Results

Hyundai Motor Q2 profit slips as firmer won, U.S. discounts hurt  Full Article 

Nokia Results

Nokia Results

Nokia raises networks outlook after Q2 profit beats estimates  Full Article 

Factory Sector

Factory Sector

China July HSBC flash PMI at 18-month high of 52.0   Full Article 

Breakingviews

Breakingviews

Apple winds up earnings hope for new gadgets  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage