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Adrift in rate-hike undercurrent

Mumbai, June 22: The rupee tumbled below the 46-mark and bond prices plunged as fears of a rate hike overran markets.

The currency settled at 46.26 to the dollar, down a whopping 32 paise compared with its previous finish and its lowest close in almost a year. Yields on the benchmark 10-year government security shot up to 5.75 per cent. Bond prices and yields move in opposite directions.

Forex market mavens blamed the rupee travails on a burst of demand for dollars amid a tail-off in share purchases by foreign institutional investors (FIIs). Even inflows from non-resident Indians appear to be thinning out against the backdrop of a possible US rate hike.

The cost of money in the US is projected to inch up with the first thrust coming from next week’s Federal Reserve meeting to consider a 25-basis point hike. That would jack up rates from a historic low of 1 per cent to 1.25 per cent.

Forex analysts reckon that the pressure on the Indian currency will remain, though the extent of its drift would depend on intervention by public-sector banks. Vivek Royzada, a senior analyst at Mecklai Financial, says 46.50 could be the next point on the rupee’s journey downhill; it may not be, if banks step in.

The scramble for dollars was evident from the first minute of trading, when nervous operators covered short-dollar positions. The rupee opened at 45.98 to a dollar, breached the 46-barrier and plunged to 46.13 early on.

Later, dealers said there was some intervention, possibly at the behest of the Reserve Bank of India (RBI), but it was not strong enough to temper the dash for dollars.

With exporters also holding back earnings abroad in anticipation of more losses, the rupee sank to a 11-month low of 46.26. It lost 27 paise on Monday, and with today’s tumble, it has come down by over 127 paise, or 2.25 per cent, in the space of less than two weeks.

Some of the analysts are of the opinion that the situation could change for the better after the budget, when FIIs are expected to make a comeback to the equity market. Yet, there are others who feel that chances of the rupee appreciation have diminished a lot due to signs of rising rates in the developed countries.

“The budget will lay down the broad policy, but it can do little to bolster the rupee, whose movements will be guided by interest rates in the US,” an analyst said.

Bonds buffeted

Yields on the benchmark 10-year security have gone up 30 basis points to a year’s high in the past two sessions, reflecting investors’ anxiety over rising inflation and the possibility of a rise in rates at home, as a result of the likelihood of similar trends in the West.

The market sees a signal of rising borrowing costs in RBI governor Y. V. Reddy’s remark that the central bank will have to revisit its monetary policy stance if global interest rates harden. While some expect this to happen in October, others feel it could take place long before that.

Stock tedium

It was a listless session on stock markets, where investor interest waned in the run-up to the Union budget. On Dalal Street, the BSE sensex closed at 4735.86, down 2.76 points from Tuesday’s finish of 4738.62. The volume of business, though low, was higher at Rs 1494.37 crore from Rs 1331.91 crore yesterday.

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