Thursday, July 18, 2013

Markets this week: Volatile Bond market, Big FDI reforms and Range-bound stock market:

The week began on a brisk note with stock markets showing gains but the Indian Rupee was struggling below Rs60 to the dollar.  The situation was getting out of control for the RBI and the Government from inflation management and CAD perspective.  Left with little room for error, on Monday evening around 8 pm, RBI introduced a slew of measures with an eye of propping up INR.  They increased the MSF rate to 10.25 and restricted the bank borrowings to Rs75,000 crores from RBI.  The reason attributed was that liquidity in Indian markets is driving the Rupee down.  

Thanks to the RBI’s sudden and drastic monetary tightening, the yields on G-Secs and Corporate bonds rose by more than 0.5% in the last 3 days.  This resulted in big drop in NAVs of debt mutual funds, particularly funds with long duration maturities.  

The Rupee today was trading at Rs59.70 to the Dollar after having gained a mere 50p due to the various measures of RBI.  

I think RBI was barking at the wrong tree.  Rupee depreciation is driven not only by liquidity in the system but also due to genuine dollar demand by importers, particularly for oil.  Unless we as a nation reduce the oil imports and the resultant dollar outflows, we are forced to depend on FII investment flows to meet our Current Account Deficit.  Not a very healthy situation to be in. 

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