Indian bonds tumble as rupee hits record low; Fed decision hurts

By Swati Bhat

MUMBAI (Reuters) - Indian government bonds slumped on Thursday as the rupee's steep fall to a record low raised concerns about continued foreign selling at a time when emerging markets are under pressure after the U.S. Federal Reserve signalled an end to its monetary stimulus.

Data from China showing a further slowdown in the economy also roiled emerging markets.

The rupee ended 1.4 percent lower on day after having touched a life low of 59.9850, prompting the Reserve Bank of India to rush in to sell dollars via state-run banks which helped it recover some ground by the close.

The prospect of an end to cheap Fed cash is leading to bond liquidation across emerging markets including India, which is stuck in a cycle in which a weaker rupee is making foreign investors sell debt and thus, causing further currency losses.

Foreign institutional investors (FIIs) have sold a net of $4.8 billion in the 21 sessions to Wednesday.

"Although we do not expect FIIs' selling of bonds to move the yields significantly higher, the near-term supply pressure is likely to keep sentiment weak for government bonds," said Nagaraj Kulkarni, a senior rates strategist for South Asia at Standard Chartered Bank in Singapore.

Analysts expect markets to remain range-bound and at some point valuations are likely to look attractive to local investors and limit a sharp rise in yields.

The benchmark 10-year bond yield closed at 7.39 percent, up 13 basis points (bps) on day, its biggest single-day rise since April 20, 2012. Volume was at a low 378.80 billion rupees compared with the average 600 billion rupees seen recently.

Dealers will await the outcome of the auction of 420.22 billion rupees in unused government debt limits later in the day for cues on foreign funds' appetite and interest in domestic rupee debt.

Traders said they would continue to closely monitor movements in the rupee to gauge its impact on the financing of the current account deficit, a key parameter being watched by the central bank as per recent policy statements.

The benchmark five-year OIS rate ended up 30 bps at 7.25 percent, its biggest single-day rise since July 29, 2008. The one-year rate closed 24 bps higher at 7.44 percent, its biggest single-day gain since July 26, 2011.

(Editing by Subhranshu Sahu)