Markets snap back as RBI throws oil lifeline

Aug 30 2013, 00:01 IST
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SummaryEquities roared back into rally mode even as the rupee rebounded and bonds regained value

Equities roared back into rally mode on Thursday even as the rupee rebounded and bonds regained value. The Indian currency notched up its biggest gain since 1986, pulling back from a record low on Wednesday, driven up by the Reserve Bank of India (RBI)’s plan to supply dollars to state-owned oil marketing companies for purchases of crude oil. The rupee surged 3.4 % to 66.5950 per dollar, the biggest gain since March 1986; on Wednesday, the currency had hit a historic low of 68.825 against the greenback, the worst single-day fall since the currency was partially freed in 1993.

Speculation that the government might hike the price of diesel by as much as R3-5per litre, in a one-time measure to save on subsidies, helped the sentiment in equities. The Sensex put on 404.89 points to end the session at 18401.04. Bonds rallied with the yield on the benchmark bonds, coming off by 19 basis points to 8.781% — although they rose to 8.876 in intra-day trades — after nudging 9% on Wednesday. The RBI’s plan to supply dollars directly to oil companies via foreign-exchange swaps may boost the rupee toward 65 per dollar, analysts pointed out. Typically, refiners pick up approximately $300-350 million a day from the market. The last time the RBI made special arrangements for supplying dollars to oil firms was after the Lehman crisis in 2008.

Meanwhile, RBI governor Duvvuri Subbarao said on Thursday that while the speed and timing of the currency’s depreciation may be linked to the US Federal Reserve’s plan to taper its quantitative easing programme, the root cause of the currency weakness lay in domestic structural factors. Throwing the ball in the government’s court, Subbarao said the only lasting solution to India’s external sector concerns is to reduce the CAD. “Reducing the CAD requires structural solutions — the RBI has very little policy space or instruments to deliver the needed structural solution. They fall within the ambit of the government,” he observed.

“It cannot be denied that the country is faced with a difficult economic situation,” Prime Minister Manmohan Singh said after leader of the Opposition Arun Jaitley sought his response on the rupee hitting a life-time low.

“There are several causes and I do not deny some domestic factors too are responsible,” he said. Listing some of the external factors that have impacted rupee and Indian economy, Singh said US monetary stance

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