NEW DELHI – The rupee weakened against the US dollar on Monday as banks bought the greenback on behalf of importers as crude prices hardened globally. A rise in US Treasury yields and the dollar index also soured the view on the Indian currency, dealers said.
The partially convertible rupee settled at 74.2500 per US dollar against 74.1500 per US dollar at the previous close. The Indian currency moved in a band of 74.1300-74.3600/$1 in the day.
Crude oil futures for February delivery on the New York Mercantile Exchange gained over 2 per cent on Friday, while Brent crude, the global benchmark, rose to its highest in more than three years, as investors bet supply would remain tight amid restrained output by major producers.
Elevated crude oil prices worsen the outlook on India’s current account and inflation as the country is the world’s third-largest importer and consumer of the commodity.
The yield on the 10-year US Treasury note rose to touch distance of the psychologically significant 1.80 per cent mark as investors prepared for tighter monetary policy in the world’s largest economy.
The Federal Reserve has signalled that it may raise interest rates three times in 2022 to combat surging inflation in the country. Higher US interest rates typically dim the appeal of assets in riskier emerging markets such as India.
Foreign portfolio investors embarked on a ferocious selling spree in Indian equities in the last three months of 2022 as the commentary emanating from the Fed pointed to a quicker pace of interest rate hikes in the US.
While that selling pressure has abated in January, currency traders remained jittery ahead of the Fed’s next policy statement on January 26.
“Dollar yields and crude oil prices have gone up, there is a big event next week in the form of the Fed and there is a clear view among some quarters that the rupee could be in for some correction after the appreciation we saw in mid-December,” a dealer with a foreign bank said on condition of anonymity.
“The RBI had been intervening on the other side (buying dollars) when rupee had strengthened past 74/$1 and we feel now that the range will be within 74.25-74.50/$1 before the US policy statement,” he said.
Government bonds sold off, with the yield on the most liquid paper – the 6.10 per cent 2031 bond- hardening six basis points to close at 6.64 per cent.
The new 10-year benchmark 6.54 per cent 2032 paper, auctioned for the first time on Friday, ended the day at 6.62 per cent. Bond yields and prices move inversely.
Sentiment in the bond market has taken a turn for the worse lately due to consistent sales of gilts by the RBI in the secondary market. The central bank’s sales are adding to an already heavy supply burden for the market.
The weak bond demand can be gauged from the fact that the RBI has been compelled to devolve significant portions of weekly debt sales on the books of primary dealers to signal its discomfort with higher yields.
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