India’s 10-year bonds dropped for an eighth week, the longest stretch of losses since 2000, as the rupee’s slide renewed concern the central bank will delay reversing steps it took to stem currency depreciation.
The Reserve Bank of India raised two interest rates and drained liquidity last month, while keeping the benchmark repurchase rate unchanged, after the rupee plunged to a record low of 61.2125 per dollar on July 8. Governor Duvvuri Subbarao said July 30 that he will roll back the measures once the exchange rate stabilizes. The local currency capped its worst week in two years.
The RBI “will likely find it difficult to quickly reverse” the measures “as that could be seen as a lack of resolve on the part of the central bank to support the currency and could be an additional risk for the rupee,” analysts from Barclays Plc led by Siddhartha Sanyal in Mumbai wrote in a report today. “We expect the current RBI measures to be reversed only in the fourth quarter of 2013.”
The yield on the 7.16 percent government bonds due May 2023 climbed 12 basis points, or 0.12 percentage point, this week to 8.29 percent in Mumbai, according to prices from the central bank’s trading system. The yield, which surged 20 basis points today, reached 8.42 percent on July 24, the highest level for a benchmark 10-year note in 14 months.
The rate jumped 75 basis points in July, the most for a 10-year benchmark since March 2009. The rupee weakened 3.4 percent this week, the most since the five days through Sept. 23, 2011.
RBI Governor Subbarao held the repurchase rate at 7.25 percent on July 30, a day after the central bank said the rupee has become the priority for monetary policy. The RBI reduced its expansion forecast for the year ending March 2014 to 5.5 percent from 5.7 percent.
The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, jumped seven basis points this week to 9.39 percent, according to data compiled by Bloomberg. It rose one basis point today.