Indian rupee, bonds tumble after RBI surprises with hawkish stance
mumbai — Indian bonds tumbled as unexpectedly hawkish central bank minutes added to the pressure of higher oil prices, boosting bets policy makers will raise interest rates. The rupee fell to its weakest in more than a year.
The nation’s 10-year yield closed 9 basis points higher at 7.72 per cent in Mumbai, after jumping as much as 17 basis points earlier. It climbed 29 basis points this week. The rupee fell past 66 per dollar to the lowest level since March 2017, as foreign funds pared holdings of local-currency debt for a fifth day on Thursday.
Minutes of the April 4-5 meeting released on Thursday showed most monetary policy committee members were optimistic the economy would rebound this year and actual output would move closer to its potential. Reserve Bank of India Deputy Governor Viral Acharya said he would vote for the start of the “withdrawal of accommodation” at the next meeting in June.
The 10-year bond yield “has room to rise quite substantially,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Co. “If this new bout of spike in commodity prices sustains till the June policy, then the RBI would definitely change its stance, and August is a real possibility of a hike.”
Ten-year bonds declined for a second week after the yield surged 25 basis points last week. It had dropped in each of the previous five weeks as policy makers took a slew of measures to revive the bond market. A scheduled sale of bonds partially devolved on primary dealers on Friday. Bond trading hours were extending by more than an hour to 6.15pm in Mumbai.
“Risk appetite is already very weak, nationalised banks are booking profits wherever available, the global environment is not conducive, and on top of that, you have the hawkish RBI minutes,” said Choudhary.
One-year interest-rate swaps climbed six basis points Friday to 6.57 per cent, the highest in about two months. The move in interestrate swaps indicates that the timeline for rate hikes has been brought forward by three-to-six months, said Vijay Sharma, New Delhibased executive vice-president for fixed-income at PNB Gilts Ltd. The rupee weakened 0.5 per cent to close at 66.1075 per dollar, the fifth day of declines. Overseas investors cut holdings of rupee-denominated government and corporate bonds by 16.6 billion rupees ($251 million) on Thursday. They sold a net $98.3 million of Indian shares on April 19. Surprise move The most hawkish member of India’s monetary policy panel is likely to get support from an influential colleague, signaling an interest rate increase is more probable than a cut.
At the meeting, Viral Acharya said there was a revival in investment activity and an improvement in capacity utilisation, which boded well for the economy. As a result, he was switching from a neutral stance to shift “decisively to vote for a beginning of ‘withdrawal of accommodation’ in the next monetary policy meeting in June.”
Minutes of the policy meeting this month showed most members of India’s monetary policy committee are optimistic that Asia’s thirdlargest economy will rebound this year with the output gap closing, a factor that is likely to boost inflation in coming months.
A majority of the six-member panel flagged upside risks to inflation earlier in April when the central bank retained the benchmark repurchase rate at 6 per cent as expected. — Bloomberg