Indian bonds, rupee take US inflation scare relatively easy

Bond yields were little changed as RBI assured ample liquidity conditions without trying to control the yields

bond market
Illustration by Binay Sinha

The high US inflation numbers pushed up yields in the biggest economy of the world, but the Indian bonds, which more or less follow the US cues, were little changed as the Reserve Bank of India (RBI) assured ample liquidity conditions for the bond market without trying to control the yields.

However, the rupee lost responding to dollar strength overnight, and also because it had moved sharply this week on inflows related to Paytm’s initial public offering (IPO).

The 10-year bond yield rose three basis points to close at 6.368 per cent, from its previous close of 6.336 per cent. Rupee fell 0.18 per cent to close at 74.52 a dollar, from 74.38 on Wednesday.

The dollar index, which measures the greenback’s strength against major currencies, crossed 95 on Thursday, highest this calendar, on safe haven concerns after the US inflation jumped to 6.2 per cent in October, a 30 year high, and higher than the consensus. The inflation numbers renewed fears of a quicker rate hike cycle in the US, and triggered an emerging market sell-off.

The Indian equity markets fell for the third straight day, declining as much as 1.1 per cent, or 696 points, intra-day.

In that sense, the Indian bonds were relatively unscathed.

According to a senior bond trader with a foreign bank, the RBI governor’s assurance on Wednesday at the Business Standard BFSI Summit helped soothe the nerves of the market participants.

The governor had said, growth is becoming stronger, inflation is under control, and the accommodative stance of the RBI will keep the market liquidity comfortable.

Additionally, the governor had said the central bank is in no mood to control market yields like it did last year, “but that doesn't mean that we will just accept if suddenly the interest rates go up very steeply.”

India’s vast foreign exchange reserves adds stability to the exchange rate, and the country is much better prepared now to face a taper tantrum than what it was in 2013, the RBI governor had assured.

“Weakness in domestic equities is adding to the pressure on Rupee. However, corporate dollar inflows are keeping gains at check. Over the near term, USDINR may trade with an upward bias within a range of 74.30 and 74.80 on spot,” said Anindya Banerjee, deputy vice president at Kotak Securities.