Rupee defence drives up government borrowing costs

Jul 20 2013, 10:32 IST
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Rupee defence drives up government borrowing costs Rupee defence drives up government borrowing costs
SummaryIndia's benchmark 10-year bond ended its worst week in four-and-a-half years.

in the fiscal year that ended in March.

Investors also fret over a lack of structural reforms to attract long-term investment.

For the week, the rupee ended 0.3 percent higher after hitting a record low of 61.21 to the dollar on July 8. "We will need dollar inflows to fund our current account deficit, otherwise we could end up with a balance of payment deficit," said Ashish Parthasarthy, treasurer at HDFC Bank, who favours an offshore bond issue to attract funds. "Through intervention, we will end up losing reserves. By losing liquidity and tightening rates, growth will be hurt." On Friday, the government managed to push through its scheduled sale of 150 billion rupees in bonds, with yields roughly 50 basis points higher than a week ago.

In another sign of disruption, the underwriters for Friday's bond issue demanded commissions of between 74 and 98 paise per 100 rupees of debt on issue, much higher than the usual 1 to 2 paise fee. A paise is one-hundredth of a rupee. India grew at 5 percent in the fiscal year that ended in March, its weakest in 10 years. India's struggle to attract big-ticket investment was underscored this week when ArcelorMittal (ISPA.AS) and POSCO (005490.KS) separately scrapped plans for multibillion dollar steel mills due to problems acquiring land and other hurdles.

The RBI's next monetary policy review is on July 30 and most economists polled this week expect it to keep the policy rate and cash reserve ratio unchanged. On Thursday, the RBI rejected most bids in a sale of bonds designed to suck funds from the market, selling just over one-fifth of a planned $2 billion of debt as investors demanded higher yields than it would accept.

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