Rupee, bonds fall after RBI surprises with repo rate increase

MUMBAI Fri Sep 20, 2013 5:34pm IST

An employee poses with the bundles of rupee notes inside a bank in Agartala, the capital of Tripura August 22, 2013. REUTERS/Jayanta Dey/Files

An employee poses with the bundles of rupee notes inside a bank in Agartala, the capital of Tripura August 22, 2013.

Credit: Reuters/Jayanta Dey/Files

Related Topics

MUMBAI (Reuters) - The rupee fell and bond yields surged after the Reserve Bank of India (RBI) surprised markets with an increase in the repo rate on Friday, putting its focus squarely back on managing inflation and the fiscal deficit.

The RBI provided some reprieve to the bond market by unwinding some of the cash tightening steps undertaken since mid-July.

Still, the surprise 25 basis points increase in the policy rate to 7.50 percent and the cautious stance on inflation, led to fears that the central bank was not done with raising the repo rate. The bond and interest rate swap curves steepened.

"We actually think the entire policy statement is slightly hawkish given the modestly greater focus on inflation over growth and the central bank's admittance that the WPI inflation is likely to be higher than originally anticipated," said Nizam Idris, a strategist with Macquarie Capital.

Bond yields rose, with the 10-year bond yield closing at the day's high of 8.58 percent, up 39 bps on the day. The negative spread between the 1-year and 5-year OIS shrunk to 46 bps from 70 bps on Thursday.

The RBI lowered the marginal standing facility rate for banks by 75 basis points to 9.5 percent and the minimum daily average cash balance that banks need to maintain to 95 percent from 99 percent previously.

The cash-tightening steps were initiated by the central bank in mid-July when the rupee began sliding to a series of record lows, to fall to as much as 68.85 to a dollar in late August.

RBI Governor Raghuram Rajan said the RBI would further ease tight cash conditions if the rupee stabilised.

The overnight rate, at which banks lend to each other, fell to 9.25 percent from 10.25-10.40 percent levels after the RBI decision.

"It is an honourable exit for the RBI and is the best way Rajan could take a step back towards normalising things. The hike in repo rate gives the message that inflation is still high but he is trying to bring down the MSF corridor," said Manish Wadhawan, head of interest rate trading at HSBC in Mumbai.

"The bond yield curve and the OIS curve is steepening and it will steepen more until the central bank's next policy review in end-November."

The rupee extended losses after the decision, falling as much as 62.61 to a dollar, before suspected central bank intervention helped ease some of the losses. It closed at 62.23/24 to a dollar versus 61.77/78 on Thursday.

Still, it gained 2 percent during the week reflecting the recent inflows from the RBI's forex swap facilities as well as the Federal Reserve decision to continue with monetary stimulus.

It had fallen as much as 20 percent to record lows in late August, but has recovered around 9 percent since Rajan took office on Sept 4.

Sensex extended falls to nearly 3 percent, with banking stocks leading declines before they retraced some losses to close down 1.85 percent. The main banking index ended down more than 4 percent.

(Additional reporting by Swati Bhat & Himank Sharma; Editing by Kim Coghill and Robert Birsel)

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

Shares Hit Record

Sensex, Nifty rise to second consecutive record high

Sensex surges 500 points on BOJ easing, L&T gains

The BSE Sensex and Nifty surged to record highs for a second consecutive session on Friday after Bank of Japan's surprise expansion of its massive stimulus programme raised hopes for additional foreign inflows, boosting blue-chips such as Larsen & Toubro.  Full Article 

REUTERS SHOWCASE

Wilful Negligence?

Wilful Negligence?

SEBI piles pressure on Sahara to sell overseas hotels  Full Article 

Indian Economy

Indian Economy

India's fiscal deficit in H1 almost 83 pct of full-year target.  Full Article 

M&M Earnings

M&M Earnings

M&M Q2 net profit down 4 percent, hit by poor monsoon.  Full Article 

Ban on E-Cigs?

Ban on E-Cigs?

Govt considers ban on e-cigarettes, sale of single smokes.  Full Article 

Commodities

Commodities

Silver futures in India hit four-year low on global cues.  Full Article 

BOJ Policy

BOJ Policy

BOJ shocks markets with surprise easing as inflation slows.  Full Article 

Shadow Banking

Shadow Banking

China's shadow banking sector growing rapidly, third largest in world - FSB.  Full Article 

Reuters India Mobile

Reuters India Mobile

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