Rupee weakens despite market rally; forward premia hit

MUMBAI: The bond market fell victim to uncertainty over a government official���s comments that special oil bonds could be used by banks to meet statutory liquidity ratio (SLR) requirements. The yield on the 10-year benchmark bond rose to a high of 7.54% during the day and closed at 7.51%, above its previous close of 7.45%.

Petroleum secretary MS Srinivasan had told mediapersons that the finance ministry had approved a move to allow oil bonds issued in the current fiscal year to be used by banks to meet their SLR requirements.

Banks reacted to the comment by selling bonds, only to hear that the finance minister had later clarified that he hoped the bonds, which are given to state-owned fuel retailers to compensate them for selling fuel at government-set prices, would be given SLR status. According to market sources, the minister���s comments resulted in a knee-jerk reaction by banks, which made considerable losses because of the rumour.

The rupee weakened on Friday despite the Sensex ending the day in the green. The rupee ended the day at 39.67/68 against the dollar, weakening from Thursday���s close of 39.61/62.

It had touched a low of 39.70 during the day. Though market confidence had risen on Thursday, further concerns of foreign capital outflow weighed it down on Friday, according to a trader with a private bank. The rupee had opened at 39.64 and dealers sold rupees in anticipation of a further outflow. However, the Sensex ended the day 348 points up at 18,115 levels, and exporters sold some of their dollar-holdings, which arrested the fall of the rupee.

Forward premia took a hit, with the one-month contract plunging further into discount. It ended the day at 1.10% (0.30%) while the six-month contract slipped to 0.83% (1.06%) and the annual contract closed at 1.13% (1.25%).

Banks parked Rs 7,585 crore of surplus funds with the Reserve Bank of India���s liquidity adjustment facility through the reverse repo auction. The central bank also infused Rs 100 crore to the system through its repo operations.

The central bank did not include a market -stabilisation component in the auction of treasury bills scheduled for Wednesday. It will auction Rs 1,000 crore of two T-bills of separate maturities. According to market sources, liquidity has been coming under a strain, and the only way to stop the near-term forward contracts from trading in a discount was to cancel MSS auctions.

Inter-bank call rates remained stable through the day and ended at 6.50% after deals worth Rs 12,710 crore were transacted. Rates on the collateralised borrowing market ended the day at 4.50%, after Rs 31,944 crore was transacted. The repo option saw Rs 30,927 crore being transacted and the rates ended the day at 6.25%.