Indian bonds, rupee weaken after Powell reappointment

Indian bond prices fell while the rupee weakened on Tuesday, as investors raised bets that the U.S. Federal Reserve would stay on course for policy tightening in the middle of 2022 after the announcement of a second term for its chairman Jerome Powell.

The partially convertible rupee was trading at 74.51/52 per dollar by 0600 GMT, after touching 74.5725, its weakest since Nov. 11, earlier in the session. It had closed at 74.3950 on Monday.

The benchmark 10-year bond yield rose as much as 3 basis points on the day to 6.38%.

The dollar was near a four-and-a-half-year high against the yen while stocks and currencies in Asia's emerging markets were mostly down, after Powell's renomination for a second term as the Fed chief bolstered bets of a possibly quicker start to policy tightening in the United States.

"The key theme over the coming quarters would be policy normalisation and there is arguably greater clarity under Powell. He has turned incrementally hawkish since June's FOMC meeting and kicked off taper in November," economists at DBS wrote in a note.

For domestic bonds, the movement in global crude oil prices will also be crucial, due to its impact on inflation. Traders expect bond yields to broadly remain in a 6.30% to 6.40% range until the Reserve Bank of India's monetary policy review in early December.

Oil prices fell on Tuesday, reversing gains made in the previous session, on growing talk the United States, Japan and India will release crude reserves to tame prices despite the threat of demand faltering as COVID-19 cases flare up in Europe.

"Oil prices are muting the impact of Powell's re-appointment but a surge in oil could easily push the 10-year yield out of the current 6.30%-6.40% range," a senior trader at a private bank said.