Mumbai: Bond prices fell and the local currency lost against the dollar in initial trade on Wednesday, a day after the Reserve Bank of India (RBI) cut its cash reserve ratio (CRR) by 0.25 percentage point to 4.25%, but left the key lending rate unchanged, citing inflationary pressures.
CRR is the portion of deposits banks need to park with the apex bank.
The partially convertible Indian rupee pared some of its losses toward the end of the session to close at 53.81 against the dollar, up 0.28% from its previous close after dropping to 54.21, or 0.44%, during the day.
The yield on the 10-year benchmark bond rose further on Wednesday to close at 8.22% against the Tuesday close of 8.18%. Bond prices and yields move in the opposite direction. Yields rose and the rupee weakened immediately after the policy announcement on Tuesday. Treasury dealers attributed this to the disappointment in financial markets with the RBI action.
The apex bank cut CRR by a quarter percentage point, freeing up additional funds to the tune of Rs17,500 crore for commercial banks to lend to companies and consumers.
“The stance of RBI is seen as conservative and not cautious post recent developments. So, it is back to waiting time for shift into rate-cut mode, expected to be in January-March 2013,” Moses Harding, head of the asset liability committee at IndusInd Bank Ltd, said in a note.
“The 10-year bond yield will get into consolidation mode at 8.12-8.17% with March 2013 target at 8.02-7.97%. The impact is neutral on rupee exchange rate to extend its consolidation mode at 53.20-54.20,” Harding said.
Announcing its policy actions, the central bank hinted at a possible rate cut in the fourth quarter of the current fiscal, beginning January.
The Indian rupee has appreciated 3% since 13 September, when the Union government made policy changes and pushed for fiscal consolidation in Asia’s third-largest economy. Foreign investors have bought domestic equities worth $18.05 billion since January.