Ahead of RBI's policy, banks are seeking relief from falling bond prices and the rupee

28 Jul 2022 , 01:23 PM

Banks have expressed their worries to the Reserve Bank of India in advance of the monetary policy review. The banks are concerned about their bond holdings losing value as a result of the rupee's decline versus the dollar.

Since a lower rupee reduces the returns on local assets for foreign investors, the decline in the currency is discouraging them from purchasing Indian bonds. The rupee has fallen 6.9% so far this year, reaching a record low of 80.06 to the dollar this month. The dollar index, which is correlated to six different currencies, has increased by 11.5% this year.

Since forward premiums would decline and speculation would soar if rates were not raised, lenders are concerned that the central bank may raise rates further to support the Indian rupee. The repo rate is projected to increase by 30 to 50 basis points next month, bringing the RBI's rate hikes since May 4 to a total of 90 bps.

The variable rate papers, which are issued at weekly government bond auctions, have resulted in significant losses for banks. Up till September, the government had set aside Rs4,000 crore per week. The market has requested a smaller supply of these bonds as the price of these bonds is falling due to rising interest rates.

The price of the government's most popular floating rate bond at its weekly auctions has fallen by more than three rupees over the past five months, resulting in significant marked-to-market losses on bond holdings.