As the RBI put the squeeze on the liquidity in the banking system, the rupee perked up but hit the bond and equity markets.
The rupee ended stronger at 59.15 to the dollar against the previous close of 59.77. The Indian currency swung between a high of 59.01 to a low of 59.60 intraday.
With the Reserve Bank of India capping the amount individual banks can borrow from it to 0.5 per cent of their deposits, yields on government securities (G-Sec) jumped by about 25 basis points and prices declined about Rs 1.50.
Banking stocks got pounded on the bourses and they took down with them the Nifty and the BSE Sensex. The Nifty closed 1.44 per cent lower at 5,991 (down 87 points) and the Sensex closed at 20,091, down 1.04 per cent ( 211 points). However, the rupee’s gain could be short-lived, according to market participants. They believe that unless there is a clear guidance on the interest rate trajectory from the central bank in its monetary policy statement next week, the currency, bond and government securities market will remain volatile.
Moreover, month-end demand for the American currency from oil importers is likely to keep the Indian unit under pressure.
Funding costs to go up
Bond market players say short-term funding costs in the economy are set to go up as the RBI allowed government borrowing through treasury bills at sharply higher interest rates.
The three-month Treasury-Bill (T-Bill) for mopping up Rs 7,000 crore was auctioned at 11 per cent (against the interest rate of 7.4769 per cent in the previous auction).
The one-year T-Bill for mopping up Rs 5,000 crore was auctioned at 10.4649 per cent (against 7.5476 per cent).
The T-Bill auction interest rates indicate that the RBI is comfortable with higher interest rate in the short-term so that the rupee is kept at an even keel.
In the secondary market, the 7.16 per cent benchmark G-Sec, which matures in 2023, crashed by Rs 1.57 to Rs 91.65 (Rs 93.22 on Tuesday). Yields hardened sharply at 8.42 per cent from previous close of 8.17 per cent. Bond yields and prices move in opposite directions.
The inter-bank call money rates, the rate at which banks borrow from each other to meet their short term liquidity requirements, closed at 7 per cent from previous close of 6.50 per cent. The call rates had opened sharply higher at 10 per cent.
The laggards
Banks and other rate-sensitive stocks from the consumer durables, capital goods, metals, realty, power and auto sector were the major losers.
Hatim Broachwala of Karvy Stock Broking, in his report on RBI action, said: “With increase in daily CRR requirements, the RBI has indirectly increased CRR by about 50 basis points.
“The RBI has chosen to increase daily requirement of CRR as against an actual increase in CRR so as to not give the signal of reversal of stance in interest rate and it will also help in containing volatility in wholesale borrowing rate during the end of the fortnight.”