The 10-year benchmark bond yield on Tuesday closed at 7.16%, nearly unchanged from the previous close, after witnessing the biggest selloff since February 2 on Monday. The rupee recovered from the one-month-low level to close higher by 13 paise at 67.06 a dollar on the back of selling of the US currency by banks and exporters.
The selloff in the bond market was primarily a reaction to Urjit Patel’s appointment as the new governor of the Reserve Bank of India (RBI), which investors perceived as a signal that the central bank would not cut interest rates in the immediate term. Patel is currently the deputy governor of the RBI responsible for monetary policy and, by extension, for pushing through RBI’s inflation-targeting philosophy.
Karthik Srinivasan, senior vice-president at ICRA, said it was mostly a knee-jerk reaction and that he did not see bond yields rising significantly from these levels since the liquidity in the system is quite comfortable at the moment.
He added that an upcoming RBI announcement regarding the bond market, which is expected on Thursday, will also be keenly watched.
“Our estimates show that there isn’t much more room for a rate cut in 2016. The latest inflation numbers have also come in at the upper end of the RBI’s target. So, we don’t see rates being cut by more than 25 bps this year,” Srinivasan said. “The chances of a cut in October are pretty slim unless a really good set of macroeconomic data push the central bank to do so.”
Indian bonds have been rising steadily since July after a revival in monsoon rains and on speculation that the new RBI governor would be more aggressive in lowering rates. The improving liquidity in the domestic banking system also contributed to a surge in demand.
Meanwhile, the Indian rupee strengthened against the dollar on Tuesday to 67.06, up 0.18%, or 13 paise from the previous close, in sync with gains in other Asian and emerging market currencies. The South Korean won, the Russian rouble, the South African rand, and the Indonesian rupiah gained in the range of 0.1-1%.
The rise in the rupee was primarily due to a weakening of the US currency, with the dollar index falling 0.13% against its previous close. The greenback
weakened after US Fed vice-chairman Stanley Fischer and New York Fed president William Dudley’s hawkish remarks about the US economy.
Investors will be closely watching Fed Reserve chair Janet Yellen’s speech at the Economic Policy Symposium at Jackson Hole later this week. Yellen’s remarks are expected to provide an idea of when the FOMC would decide to hike interest rates.