Falling rupee puts pressure on RBI at $2 billion debt sale

Meanwhile, the hike in short-term interest has virtually shut down the market in commercial bonds and short-term bonds used through which companies and banks raise short-term funds.
The rupee traded on Thursday at 59.75/76, not far from its close of 59.89/90 on Monday before the RBI’s measures.
Bond yields have surged, with the 10-year benchmark bond up 51 basis points since Monday, while the Nifty has fallen 0.8 percent since then. Foreign investors have also sold more than $215 million in debt and stocks over the previous two days.
The RBI’s measures sent bond yields surging, raising the risk that Thursday’s debt sale will result in a stand-off between the RBI and investors unwilling to meet its price expectations.
“What is important is the yield at which it is being offered. While RBI has not disclosed, where the demand is, it is obviously clear that it is higher than what the RBI may have offered,” said Jyotheesh Kumar, executive vice president at HDFC Securities in an email to clients on Thursday.
“Friends, rates are headed higher… don’t let the spin doctors of the government hypnotise you to think that the higher rates are only temporary,” Kumar added.
If the sale falls short, the central bank may need to resort to other measures to drain rupee liquidity to deter speculators against the currency, further raising concerns about damage to an economy growing at a decade low of 5 percent.
Monday’s unexpected measures by the RBI prompted some economists to cut their economic growth forecasts and drew warnings that it may backfire by scaring off foreign investment.
“The (RBI’s) unexpected monetary tightening may well stabilise the rupee in coming weeks, but could prove very negative for public finances and the economy,” Credit Agricole said in a note dated Wednesday.
An official familiar with the RBI’s thinking said the central bank acknowledged that it would be tricky balancing objectives to achieve a successful result in the debt sale, to be conducted through an open market operation.
“These are two different objectives. The measures were monetary management, which were aimed at curbing liquidity. While debt management is about raising debt cost-effectively,” the official told Reuters, declining to be identified.
“The OMO will be a monetary management exercise which is different from debt management objective,” the official said.
OMOs are bond purchases or sales by the central bank from its own stock to add or drain cash and do not have cost implications for the government, giving the RBI more leeway on pricing.
At weekly bond auctions conducted on behalf of the government, however, the RBI would be more mindful of paying too much interest. On Wednesday, it rejected all bids in a $2 billion sale of Treasury bills on behalf of the government.
“Crucially, it does not address the underlying issue of India’s external imbalance. It has made India less attractive to foreign investors and may reduce the portfolio inflows needed to plug the (current account) gap.”
The rupee was close to losing all gains made since the RBI launched a defence of the currency by squeezing liquidity and raising short term rates, putting pressure on the bank to accept paying higher yields at its $2 billion debt sale later on Thursday.
The Reserve Bank of India is due to sell 120 billion rupees via open market operations as part of its three-prong plan unveiled late on Monday to drain cash from the market to support the rupee, which has lost nearly 10 percent against the dollar since the start of May.

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