Aug 20, 2013 08:48 AM IST | Source:

Here's why the bloodbath continued in rupee-bond markets

A raft of measures taken by the Reserve Bank of India (RBI) seems to have fallen flat. The Indian rupee on Monday closed all time record low at 63.13 as against the US dollar. The 10-year benchmark bond yield spiked nearly 35 basis points to 9.23 percent.

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Saikat Das

A raft of measures taken by the Reserve Bank of India (RBI) seem to have fallen flat. The Indian rupee on Monday breached the 63/USD mark before closing at an all time record low of 63.13/USD. It touched an intra day low of 63.30/USD. The 10-year benchmark bond yield spiked nearly 35 basis points (bps) to 9.23 percent.

Also read: Reversing trend: Axis Bank hikes base rate by 25 bps

What is triggering the panic?

In the last one month, the central bank has issued a host of measures (liquidity tightening), which squeezed fund flows in the market by making it costlier. However, those proved to be short-term solutions and failed to bring back stability in the markets.

"We have to go beyond quick-fix or short term solutions," Ananth Narayan, Co-Head of Wholesale Banking, South Asia, Standard Chartered Bank told

"Till date, we have not addressed the core issues. We need to look at our fundamental problems. CAD and growth are the two most important factors. Every time, we cannot just do away with it saying that it will take time to resolve. Around Rs 73 lakh crore worth of infrastructure projects are stuck halting country's growth. Once markets get strong signal about those two policy issues, the sentiment will turn positive instilling confidence," he said.

The current account deficit (CAD) had touched the historic high of 4.8 percent of the GDP in 2012-13 and has blamed for the rupee's decline.

Rupee trading

Oil importers on Monday were seen buying dollars to meet their month-end requirements. They pay for import bills for which they are to convert rupee into dollars. Moreover, the sharp fall in the equity market indices, added to dollar demand as the exiting overseas investors need to convert the domestic currency.

Traders feel that the rupee may touch 65 soon against the greenback. In August, 2011; the rupee was at around 45/USD.

Trading in bonds

In the government bond market, volumes dropped drastically to around Rs 12,000 crore compared to Rs 50,000-1,00,000 crore recorded a few months back. It averaged around Rs 10,000 crore last week, reflecting poor investor appetite.

However, the spike in yields resulted in lower bond prices. Yield and price move in opposite direction. Some investors are sensing opportunities to invest at lower prices but hesitant to do that due to prevailing uncertainties, traders said.

"You have to wait for some time to materialize some measures like on foreign capital raisings taken by the FM. RBI measures were on short term basis. Unless the CAD and growth issues are resolved, we have to live with this form of volatility," said D K Joshi, chief economist at CRISIL - the domestic arm of the global rating agency S&P.

More RBI measures....?

Traders are expecting further measures from RBI and the government both. However, experts ruled out any more steps.

According to Moses Harding, the executive director and chief business officer at Lakshmi Vilas Bank, multiple factors are adding to the negative sentiment.

"We cannot expect RBI to come with measures everyday. All the previous RBI actions could not sustain its effects. The fear of financing the CAD is hurting investors, who are equally worried on the prospect of growth due to RBI's liquidity tightening measures," he said.

For refinancing, banks currently borrow at 10.25 percent from RBI Marginal Standing Facility (MSF - a window for banks), or raising funds through deposits. If you compare the average cost of funds with the gains from government bond investments, it is not worth-investing.

However, the credit growth is not picking up. Hence, banks may not have other options but to put in government bonds, some argued.

Standard Chartered's Narayan believes that the recent measures taken by the Finance Minister will yield results. Measures taken to curb gold imports will help reduce trade deficit.

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