Rupee, gilts gain as steep fall in inflation stokes optimism

Rupee, gilts gain as steep fall in inflation stokes optimism

NEW DELHI: The rupee on Wednesday managed to snap a two-day losing streak against the US dollar and strengthened against the greenback, as investors welcomed a sharp decline in India’s headline retail inflation print for September, dealers said.

The domestic currency was also buoyed by the fact that Brent crude oil prices saw a decline on Tuesday after the International Monetary Fund raised renewed concerns over global economic growth.

The rupee on Wednesday closed at 75.3650 per US dollar against 75.5060 on Tuesday. With some foreign banks stepping in to sell the dollar on behalf of exporters, the rupee touched a high of 75.1900 per dollar on Wednesday.

So far this week, the rupee has lost 0.5 per cent against the US dollar, taking the depreciation for the month as a whole to 1.5 per cent, as skyrocketing global crude oil prices brought worries of imported inflation and a weaker trader deficit back to the fore as India is a massive buyer of the commodity.

A sharp global strengthening of the US dollar on the back of the US Federal Reserve’s talk of a tighter monetary policy has also dragged the rupee lower this month. The dollar index, a gauge which measures the US currency against six major rival units, earlier this month touched a one-year high. The gauge was last at 94.26, down from 94.52 at previous close.

Dealers said with RBI likely intervening in the market on Tuesday, those who were betting against the domestic currency had now scaled back some of these bets.

“Yesterday (Tuesday), once the rupee went past 75.50 per dollar some PSU banks started selling (the dollar) on behalf of the RBI, most likely, that has now given the market some confidence, even as global factors are not looking great,” a currency trader with a large private bank said on the condition of anonymity.

“The CPI data was also a sentiment booster in the morning for the rupee. Core inflation still remains high but RBI will focus on headline CPI and going by that they could put aside rate hikes by a couple of months,” he said.

Data released after trading hours on Tuesday showed India’s headline retail inflation eased to 4.35 per cent in September from 5.3 per cent a month ago.

The sharp decline in the consumer price gauge is seen providing some elbow room to the RBI, which at its monetary policy statement last week, was perceived as providing signals of policy normalization.

Unlike currencies in developed markets which benefit from higher interest rates (and an attendant rise in bond yields), the rupee tends to weaken when rates are hiked because of lower inflows into equity markets.

Government bonds gained on the back of the steep decline in inflation in September, with yield on the 10-year benchmark 6.10 per cent, 2031 paper settling two basis points lower at 6.31 per cent. Bond yields and prices move inversely.

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