Rupee, bond prices fall as RBI, US Fed turn hawkish

Mumbai: The Indian rupee and government bond prices fell on Thursday following hawkish comments from the Reserve Bank of India (RBI) and faster than expected rate hike in the US.

At 1.35pm, the home currency was trading at 65.02, down 0.39% from its previous close of 64.77. The rupee weakened past the 65 mark for the first time since 21 November 2017 and hit a low of 65.09 a dollar in opening trade.

Bond yields gained for the fifth trading session to hit a fresh two-year high. The 10-year bond yield rose to 7.775%, a level last seen on 25 February 2016, compared to its Wednesday’s close of 7.710%. Bond yields and prices move in opposite directions.

Minutes from the Reserve Bank of India’s (RBI) latest policy meeting showed that most of the members of the monetary policy committee (MPC) were concerned about accelerating inflation.

One member of the MPC said a series of rate hikes may be warranted because of rising risks to inflation, while others hinted at a change in policy stance if those risks materialize, Mint reported

Kotak Economic Research expects the RBI to maintain a status quo, at least through the first half of the current year 2018, as it awaits clarity on minimum support prices (MSPs), sustainability of high crude oil prices post the winter squeeze, monsoons and global financial conditions.

“Overall, even as MPC has sounded vigilant on upside risks, we reckon that amid still-subdued capacity utilization levels, and ‘need to carefully nurture’ the nascent recovery, MPC will be on a wait and watch mode,” the Kotak report added.

Overseas, US Federal Reserve minutes showed that interest rates may rise faster than expected as US economy is gaining momentum.

“A classic divergence, while the Fed minutes demonstrate more optimism over stronger growth and higher inflation, MPC minutes portrays slightly defensive overview over growth momentum with adequate concern over rising inflation dynamics. In this kind of puzzling condition, ensuring harmonization between policy rate and market based rates in sync with domestic conditions is extremely difficult, oil price could play extremely critical role,” said Soumyajit Niyogi, associate director, India Ratings and Research.

India’s benchmark Sensex index fell 0.26% or 86.37 points to 33,758.49. So far this year, Sensex has fallen 0.83%.

Year to date, the rupee has weakened 1.8%, while foreign investors have bought $1.08 billion and $1.82 billion in equity and debt markets, respectively.livemint