India 10-yr yield sees biggest weekly rise in 6 months; rupee gains
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MUMBAI - India's benchmark 10-year bond yields on Friday recorded the biggest weekly rise in six months amid concerns of heavy debt supplies and inflation, while the rupee inched higher to register a third straight week of gains.
U.S. Treasury yields on most maturities rose overnight as investors prepared for an earlier-than-expected interest rate hike and a possibility the Federal Reserve may cut its bond holdings sooner than many initially thought.
The Reserve Bank of India has so far held rates at record lows and said its expects inflation to start dropping from recent highs, but traders are growing worried as global crude prices gain.
The price rise has a direct impact on domestic inflation as India imports around 80% of its oil requirements. Oil prices were heading for their biggest weekly gains since mid-December.
"The RBI can delay rate increases to an extent but inflation targeting is their mandate and with how things are playing out globally, we will see them being forced to act sooner rather than later," a senior trader at a foreign bank said.
The benchmark 10-year bond yield ended at 6.54%, its highest closing level since Jan. 31, 2020, up 1 basis point (bp) on the day. On the week, the yield rose 9 bps, its biggest weekly rise since the week ending July 9.
India is unlikely to reduce its fiscal deficit as aggressively as previously targeted in the upcoming budget, sources told Reuters. The higher fiscal deficit will further raise concerns around heavy debt supplies and hurt bonds.
"We expect the 10-year yield at 6.55% by March-end and to rise to 6.7% by H2 FY23 as global yields continue to climb, and the RBI starts raising the repo rate," HDFC Bank economists wrote in a note. The bank expects a total 75 bps increase in the repo rate in 2022/23.
The partially convertible rupee ended at 74.3050/3150 per dollar compared with its close of 74.49. The unit rose marginally to record a third straight week of gains.
Most other Asian currencies weakened during the week following the U.S. Fed's meeting minutes. [EMRG/FRX]
The rupee, however, has been helped by foreign fund inflows into the domestic share market in the new year, while dollar inflows towards Reliance's $4 billion fund raising is also seen aiding. [.BO]
Traders, however, expect the RBI to intervene to prevent a very sharp appreciation in the currency and expect it to hold in a 74-74.80 range next week.
