Indian bonds and the rupee gained as a plunge in crude prices eased inflation concerns and pressure on the external finances of the oil-importing nation. Benchmark 10-year yields fell as much as nine basis points to 7.10%, while the rupee strengthened 0.3% to 94.36 per dollar. Brent pushed lower after tumbling more than 8% in the previous session, as investors bet that a Democratic sweep in the US midterm elections may accelerate efforts to end the war in the Middle East.
This week's rally reflects growing relief among traders over the country's inflation outlook and import bill, following a recent surge in bearish bets. Last month, the 10-year yield neared a four-year high as traders priced in a faster pace of monetary tightening. VRC Reddy, head of treasury at Karur Vysya Bank, said the bond rally is being shaped by changing expectations of how much the RBI may raise interest rates. "We now expect the policy rate to climb to 6.25% versus a high of 6.50% earlier," he said. "For the 10-year yield, I see 7.10% as a floor," as banks are likely to sell the benchmark around that level.
Still, the rupee's gains may be capped. The Reserve Bank of India would need to buy dollars to replenish reserves after the recent drop in its forex stockpile. Australia and New Zealand Banking Group strategist Dhiraj Nim expects the currency to struggle to gain past 93-94, as the RBI may step up dollar purchases around those levels. The central bank announced a fresh set of sweeping currency-market curbs last month after the rupee neared a record low.
Those steps, along with the recent slide in oil prices, have provided some reprieve to the struggling currency. Barclays Plc strategist Mitul Kotecha said markets will remain alert to further measures from the RBI to defend the currency, including tighter liquidity management.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing