Indian Rupee, Bonds Slide As Global Markets Add To Domestic Woes

The Indian rupee weakened and bond yields rose further on Thursday as traders took note of adverse developments globally, which only added to local pressures.

The benchmark 10-year bond yield rose to its highest level in two years and traded above 7.80 percent on open. At 10 am, the 10-year bond yield was trading at 7.76 percent.

Traders reacted, in part, to minutes from the Federal Open Market Committee (FOMC), which suggested that the US Federal Reserve believes that there is substantial underlying economic momentum in the US economy, which could withstand rate hikes. The US 10-year bond yield rose to 2.96 percent in overnight trade.

Back home in India, minutes of the Monetary Policy Committee (MPC) showed that most members are concerned about rising inflation pressures. RBI Governor Urjit Patel, in his statement noted that inflation is getting generalised, but also added that the nascent growth recovery needs to be supported.

The market perceived both FOMC and MPC minutes to be hawkish, said Lakshmi Iyer, chief investment officer (debt) at Kotak Mutual Fund.  

The benchmark 10-year Indian bond yield has risen from 6.42 percent on 21 June 2017 to over 7.75 percent now. Bond yields have risen in anticipation of higher inflation, a wider fiscal deficit and lack of demand for the incremental bond supply coming into the market.

In the currency markets, the rupee slid in response to a stronger dollar and higher global bond yields. The rupee traded below the 65/$ mark for the first time since November 2017.

Foreign inflows have slowed in February with investors pulling out Rs 6,400 crore from the equity markets in February. Debt market inflows, while positive, has also slowed. In addition, importer demand for dollars has picked up in the last few days following a fraud detected at Punjab National Bank. The fraud linked to fraudulent ‘Letters of Understanding’ has led to concerns that roll over of buyer’s credit may be tougher in the near term.

There is higher demand from importers over the last few days although it is difficult to tell what the exact cause is, said a currency trader who spoke on the condition of anonymity.

At 10 am, the Indian Rupee was trading at 65.02/$. The Rupee’s decline was in line with other Asian currencies, which all traded weak on Thursday.

(This article was first published in BloombergQuint.)

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