India’s 10-year bond yield headed for the biggest monthly advance in four years as a plunging rupee raised concern the central bank may have to prolong increases in borrowing costs intended to support the currency.
The rupee fell to within 0.1 percent of a record low today and has dropped 3.3 percent against the dollar this week. The Reserve Bank of India said yesterday this month’s increases in the bank and marginal standing facility rates will be reversed in a measured way as the currency stabilizes.
“While the RBI has guided that these measures are temporary, there is no guarantee that depreciation pressures will end within that timeframe,” Nomura Holdings Inc. economist Sonal Varma in Mumbai and strategist Vivek Rajpal in Singapore wrote in a note yesterday. “In our view, the rupee is fundamentally poised to weaken.”
The yield on the 7.16 percent bonds due May 2023 rose 87 basis points in July to 8.32 percent as of 10 a.m. in Mumbai, according to prices from the central bank’s trading system. That was the biggest monthly advance for a benchmark 10-year yield since March 2009. The rate increased six basis points today and reached 8.42 percent on July 24, the highest since May 2012.
India’s currency has been hurt by a record current-account deficit and the prospect of less U.S. monetary stimulus, which has spurred capital outflows from emerging markets. Global funds have cut holdings of Indian debt by $8.9 billion from a record $38.5 billion on May 21. The Federal Reserve said May 22 that its asset-buying program could be tapered if the U.S. job market continues to improve.
Governor Duvvuri Subbarao held the repurchase rate at 7.25 percent yesterday, after the RBI said July 29 the rupee has become the priority for monetary policy. The central bank this month capped the amount banks can borrow in daily repurchase auctions at 0.5 percent of deposits and increased the daily balance requirement for lenders’ cash-reserve ratios to 99 percent from 70 percent. It also raised the marginal standing facility and the bank rate to 10.25 percent from 8.25 percent.
The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose 12 basis points, or 0.12 percentage point, today to 9.61 percent, data compiled by Bloomberg show. It touched 9.63 percent, the highest level in almost five years.