Mumbai, July 1: The rate roulette has begun. Bond prices soared, the rupee hardened and banks bumped up returns on non-resident deposits in the first signs of a possible realignment at home as a result of the Fed hike.
Money chased government bonds (gilts) in the first few hours of trading this morning as investors who had discounted the rise in US rates, decided to buy afresh.
However, the rally could not be sustained as concerns at home soon overtook the Fed move. One of the biggest worries for the market is how inflation will behave.
The yield on 10-year gilts — widely used as a benchmark for long-term interest rates — finished almost unchanged after hitting a low early on and rising later. Gilt prices and yields are inversely related — when one goes up, the other slides, and vice versa.
As trading began today, the Fed statement boosted bond prices, sending the yield on the 10-year gilt tumbling to 5.76 per cent from 5.84 per cent on Wednesday.
The bond markets took comfort in the Fed’s declaration that it would follow a measured pace on rate hikes. This would mean the central bank would go for a gentle nudge rather than a push.
The rupee, which typically would have been under pressure because of rising interest rates abroad, bounced back to 45.92 instead, helped by forex market players who had already conditioned themselves to a Fed hike.
The weakness of the dollar against major global currencies — following the 25-basis points rise in US interest rates to 1.25 per cent — also helped the rupee.
In choppy trading, the rupee clawed back above the crucial 46-mark in a whopping gain of 14 paise over Wednesday’s close of 46.06. Earlier in the session, the currency hit an intra-day peak of 45.84 after opening at 45.96.
Despite the appreciation of the rupee, analysts continue to remain worried over the impact of a rise in US interest rates on emerging markets. Some feel such increases could send investors into overseas assets, choking off inflows to the country and putting pressure on the rupee. In recent months, the rupee had made big gains against the greenback, boosted by robust foreign capital flows and NRI remittances.
Uco Bank and Indian Overseas Bank announced an increase in the interest rates on their NRE deposits. A Uco release said rates have been raised to 2.5 per cent (from 2.1 per cent) on deposits of less than 2 years, 3.2 per cent (2.9 per cent) of two to three years and 3.7 per cent (3.5 per cent) if the money is kept over three years.
NRE deposits kept at IOB for one to two years will fetch 2.50 per cent (2.10 per cent). The rate will be 3.20 per cent (2.90 per cent) for two to three years and 3.70 per cent (3.50 per cent) for three to five years.