Rupee falls 37 paise as govt rules out sovereign bond option

The rupee weakened on Monday after government sources told Reuters that the government is not considering issuing a sovereign bond to offshore investors right now, dampening hopes for large dollar fund inflows which could have changed the rupee's fortune.

The government instead aims to attract dollar flows from non-resident citizens to support the rupee or it could also allow some companies to raise debt abroad, two senior government officials familiar with the matter told Reuters on Monday.

The officials also said the Reserve Bank of India (RBI) could look to raise the key policy rate if the rupee once again weakens toward 61-62 levels.

"The sovereign bond issue not being an option and the repo rate hike are both negatives for the rupee," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.

"I expect the rupee to hold in the recent 59-60 per dollar band this week."
Traders broadly expect the central bank to sell dollars via state-run banks if the rupee tries to breach the 60 per dollar mark, they said.

The partially convertible rupee closed down by 37 paise, its biggest drop in two weeks, at 59.72/73 per dollar compared with 59.35/36 on Friday.

Traders said the larger impact was seen on the onshore dollar forward premiums, which shot up post the comments.

The rupee, which fell to a record low of 61.21 on July 8, has seen little recovery since the central bank's measures last week. Instead, the steps roiled the bond market and pushed up government borrowing costs.

Bond option open: FinMin

With rupee continuing to be a worrying factor for the economy, Government today said the first sovereign bond issue in 12 years was an option before it to tackle forex volatility.

"... all options are on the table and are examined from time to time. Steps are taken by the government at the appropriate time," a Finance Ministry statement said.

The statement came amidst reports that the government has momentarily shelved the option of an NRI bond issue to tide over the slump in rupee against the US dollar which had not only widened the current account deficit, but also strained domestic prices.

The government had used NRI bond issue option as a tool to stem rupee fall only on three occasions in the past-- in 1991, 1998 and then in 2001.