Rupee, government bonds gain as mkts cheer sharp decline in CPI inflation

The domestic currency on Wednesday opened at 75.3150 to a dollar, stronger than 75.5060 per dollar on Tuesday. At 10:20 hours (IST), the local unit traded at 75.2675 per dollar.

Data released after trading hours on Tuesday showed that India’s headline retail inflation declined sharply to 4.35 per cent in September versus 5.30 per cent in August.

While domestic retail inflation has been softening over the past couple of months, a recent jump in global crude oil prices had led to fears of fresh upside risks to inflation.

Crude oil prices have climbed to multi-year highs since last week due to concerns of global demand outstripping supply.

Comfortingly for local currency traders, Brent crude futures declined on Tuesday, with the contract for December delivery shedding $0.23 to close at $83.42 per barrel.

“There is a pull-back in crude oil prices which is providing support but the larger positive is the sharp decline in inflation,” a dealer with a large private bank said on condition of anonymity.

“After the kind of depreciation we have seen this month, there is also some dollar selling by foreign banks for exporters. Because they want to lock in a good level. 75.50/$1 was breached yesterday but it is unlikely that RBI will let it go to 76/$1 very soon,” he said.

The rupee has shed around 1.5 per cent against the US dollar so far this month.

Government bonds also gained with yield on the 10-year benchmark 6.10%, 2031 paper last at 6.31%, two basis points lower than previous close, as traders welcomed the inflation print for September.

Bond prices and yields move inversely.

With the fall in headline retail inflation last month providing breathing room to the RBI, bond dealers believe that the central bank may not be in a rush to commence raising interest rates.

“After the last policy statement (on Friday), there was a lot of talk about how the reverse repo rate will be raised in December, I think RBI could stretch it out till February, given that inflation so far is behaving itself. The only joker in the pack is oil prices,” a dealer with a large foreign bank said on condition of anonymity.