Rupee closes stronger at 68.42 per dollar as Jaitley sticks to fiscal deficit target


Mumbai: The Indian rupee strengthened against the US dollar, and bond yield dropped, after finance minister Arun Jaitley said the government will retain the fiscal deficit target of 3.5% of the gross domestic product (GDP) for fiscal 2017. The gains in the rupee were also due to improved fiscal deficit.

The rupee closed at 68.42, up 0.31% from its Friday’s close of 68.63. The rupee opened 68.69 and touched a high of 68.36 in intraday trade, a level last seen on 18 February.

India’s fiscal deficit was Rs.5.32 trillion during April-January, or 95.8% of the full-year target, as compared with FY16 target of Rs.5.56 trillion, government data showed.

The 10-year bond yield fell 16 basis points, its steepest fall since 26 May 2015, to 7.626%—a level last seen on 28 October 2015, as compared with its Friday’s close of 7.783%. It opened at 7.773 and touched a low of 7.626%, a level last seen on 3 November 2015.

The benchmark Sensex index fell 0.66%, or 152.30 points, to close at 23,002.

“The government posted a pleasant surprise by sticking to the pre-announced fiscal deficit target of 3.5% of GDP. This move is likely to have a far reaching impact on the macro economy by preserving stability. More importantly, today’s show of fiscal discipline makes it easier for the RBI (Reserve Bank of India) to continue with its accommodative stance”, HSBC Global research said in a note to its investors.

“It expects a 25bp (basis point) post-budget repo rate cut. The combination of high carry and robust fundamentals should better support the rupee, especially after its weaker start to the year”, it added.

Since the beginning of this year, the rupee has lost 3.31% on the back of outflows of about $3.63 billion from domestic equity and bond markets. Foreign institutional investors have sold $2.62 billion from local equity markets and $1.01 billion in debt markets.

The selling by foreign investors had driven up bond yields as well. Yields have risen about 25 bps since April 2015 even though the Reserve Bank of India pared policy rates by 125 bps in calendar 2015. Part of the rise in yields has been attributed to the huge supply of bonds under the government’s market borrowing in fiscal 2016.

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