Thursday, January 10, 2013

Rupee gains, benchmark interest rates down

* Rs. 28bn T-bill auction attracts Rs. 70bn;  Rs. 31bn accepted

The Rs. 28 billion Treasury bill auction yesterday (09) attracted bids amounting to Rs. 70 billion of which the Public Debt Department of the Central Bank accepted Rs. 31.33 billion with benchmark yields easing across all maturities while the rupee gained significantly against the US dollar.

The three-month bill saw its yield fall three basis points from last week to 9.88 percent. The six-month bill yield fall 18 basis points from last week to 10.81 percent while the 12-month bill yield fell three basis points to 11.35 percent.

Dealers said the Central Bank lowered monetary policy rates by 25 basis points recently not only to stimulate growth, but allow space for the government to borrow at cheaper rates. But with captive sources such as the EPF, NSB and other banks involved in the Treasury securities auctions, dealers said yields do not necessarily reflect market sentiments.

With the government not planning to borrow from international capital markets this year, economists have warned that domestic financing of the budget deficit was likely to surge this year.

The Central Bank has already warned the government to stick to its fiscal targets keeping borrowings within limits so that inflation can be contained at single digit levels.

The Central Bank is scheduled to offer Treasury bonds for Rs. 40 billion today (10).

The rupee gained significantly against the US dollar yesterday. Opening at Rs. 127.10/30 against the greenback, the rupee strengthened to Rs. 126.20/30 at the close. Currency dealers said banks were selling dollars on expected foreign buying at today’s Rs. 40 billion bond issue.

Last month, we reported a Standard Chartered Bank report which said the government could opt to issue another sovereign bond.

"If global market conditions remain conducive to such issuance, we believe the government is likely to issue c.US$ 1 billion worth of sovereign bonds, which will reduce domestic market borrowing by c. Rs. 130 billion. In our base case of sovereign bond issuance of only c.US$ 750 million, domestic market borrowing would fall by c. Rs. 97.5 billion. This should reduce net domestic market borrowing to c. Rs. 376bn and lead to a balanced demand-supply situation in the government securities market, even assuming fiscal slippage," Standard Chartered said in a report published in December.

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