Government bond yields slipped on Thursday and the rupee appreciated after the US Federal Reserve chief, Janet Yellen, indicated the Fed may not hike rates in a hurry.
On Thursday, the 10-year benchmark 8.40%, 2024 bond yield settled at 7.76%, down from 7.79% on Wednesday. Rupee ended at 62.52/$, up 0.27% from Wednesday’s close.
Yellen said the Fed would not raise rates until it is convinced of further improvement in the labour market and until inflation comes to targeted levels in the US.
“The expectations of the pace of hikes has significantly changed which has given the market comfort. The pace of hike is likely to be gradual,” said Ashish Parthasarthy, head of treasury, HDFC Bank.
A hike in the US rates reduces the interest rate differential between the US and India, thereby, making it less appealling to foreign investors, in turn triggering dollar outflows.
It could also potentially make difficult for the Reserve Bank of India to cut the repo rate. With the Fed now expected to hold on to ultra-low rates for some more time, RBI has got more room to consider cutting interest rates as the threat of dollar outflows has reduced.
Reflecting the concerns in markets across geographies, Christine Lagarde, managing director of the International Monetary Fund had also warned that emerging markets must prepare for more volatility as the Fed readies to tighten.
However, RBI governor Raghuram Rajan had alleviated concerns regarding India and had said the country has significant forex reserves to handle big dollar outflows.
Rupee rose to a two-week high in early trade as fears of dollar outflows receded following the Fed’s statement. But the currency soon pared most of its intraday gains to end just 0.27% up. Dealers said big gains by the rupee are unlikely as RBI has been preventing a sharp appreciation of the currency by buying dollars regularly. Indranil Pan, chief economist at Kotak Mahindra Bank expects 3.5-4% depreciation of the rupee by end of march 2016.
“It is a relief rally but it doesn’t impact much on the ground as US rates will still be very low compared with India,” said Jayesh Mehta, head of treasury at Bank of America-Merrill Lynch.
Foreign institutional investors (FII) have already poured in a record $6.3 billion into Indian bonds so far in 2015 as the country continues to offer one of the highest returns in emerging markets. In total FIIs have invested $11.6 billion in Indian shares and bonds.