The Indian rupee and government bond prices fell on Thursday as traders were worried due to the prospect of higher interest rates in the domestic and overseas markets.
The rupee weakened past the 65 mark for the first time since 21 November 2017 and hit a low of 65.09 a dollar in opening trade. At 5pm, the home currency was trading at 65.04, down 0.41% from its previous close of 64.77.
Bond yields gained for the fifth trading session to hit a fresh two-year high. The 10-year bond yield rose to 7.816%, a level last seen on 25 February 2016, compared to its Wednesday’s close of 7.71%. Bond yields and prices move in opposite directions.
Minutes from the Reserve Bank of India’s (RBI) latest policy meeting showed that most of the members of the monetary policy committee (MPC) turned hawkish over worries of accelerating inflation.
One member of the MPC said a series of rate hikes may be warranted because of rising risks to inflation, while others hinted at a change in policy stance if those risks materialize, Mint reported
Overseas, according to minutes from the US Federal Reserve, officials see increased economic growth and an uptick in inflation as justification to continue to raise interest rates gradually.
“A classic divergence, while the Fed minutes demonstrates more optimism over stronger growth and higher inflation, MPC minutes portrays slightly defensive overview over growth momentum with adequate concern over rising inflation dynamics. In this kind of puzzling condition, ensuring harmonization between policy rate and market based rates in sync with domestic conditions is extremely difficult, oil price could play extremely critical role,” said Soumyajit Niyogi, associate director, India Ratings and Research.
{{/usCountry}}“A classic divergence, while the Fed minutes demonstrates more optimism over stronger growth and higher inflation, MPC minutes portrays slightly defensive overview over growth momentum with adequate concern over rising inflation dynamics. In this kind of puzzling condition, ensuring harmonization between policy rate and market based rates in sync with domestic conditions is extremely difficult, oil price could play extremely critical role,” said Soumyajit Niyogi, associate director, India Ratings and Research.
{{/usCountry}}Brokerage firm DBS Bank expects 10-year bond yields to touch 7.9-8% in the coming quarters.
India’s benchmark Sensex index fell 0.37% or 124.64 points to 33,720.22. So far this year, Sensex has fallen 0.83%.
Year to date, rupee has weakened 1.8%, while foreign investors have bought $1.08 billion and $1.82 billion in equity and debt markets, respectively.