The Reserve Bank of India’s (RBI) move to transfer Rs 1.76 lakh crore to the government was well received by the benchmark equities, bond markets and the Indian rupee. The benchmark 7.26% bond maturing in 2029 jumped to three-week high after the RBI's announcement, but early profit booking amid doubts of increased spending plans by the government coupled with the risk sentiment in the Asian markets has restricted the gains.
The yield on 10-year benchmark hit a low of 6.391% largely driven by the RBI announcement before settling higher at 6.556% for the week ended 30 August. Bond market investors, who were worried about the increase in bond supply as the government planned to borrow Rs 7 lakh crore from the market, received a reprieve with the RBI's move to transfer its surplus to the government. The RBI's transfer of a large surplus improved the overall sentiment. There is hope that there won't be any fiscal slippage.
Indian rupee too moved higher along with the domestic equities as global investors confidence improved after the stimulus announced by finance minister Nirmala Sitharaman on Friday. Rupee turned higher last week after touching a low of 72.25 against the US dollar. Rupee ended at 71.40/US dollar on Friday last week, its highest since August 16. Positive domestic equities which gained by almost 1.4% during the week, de-escalation of trade tensions and stimulus announced by the government could strengthen the Indian rupee in the days to come.
Going ahead, the transfer of RBI reserves will help fill the revenue deficit gap caused by fall in tax revenue and may benefit the government with more room for further stimulus. The recent stimulus initiatives taken by the government would support the weakening economy amid domestic and global headwinds, thereby giving support to the equities and the Indian rupee. (The author is Fundamental Research Analyst, Karvy Forex & Currencies Pvt. Ltd)