India’s 10-Year Bonds Snap Three-Day Advance as Rupee Weakens

India’s 10-year bonds fell, erasing earlier gains, as the rupee’s slump to a three-week low renewed concern the central bank may have to prolong measures taken this month to tighten cash supply.

Governor Duvvuri Subbarao kept the benchmark repurchase rate unchanged at 7.25 percent today, after the Reserve Bank of India said yesterday the rupee has become the priority for monetary policy. The central bank this month raised two interest rates and drained liquidity after the currency sank to a record low of 61.2125 per dollar on July 8.

The yield on the 7.16 percent bonds due May 2023 climbed 13 basis points, or 0.13 percentage point, to 8.26 percent in Mumbai, according to prices from the central bank’s trading system. It fell to as low as 8 percent intraday after RBI said increases in other borrowing costs to stem the rupee’s slide will be reversed in a measured way as the currency stabilizes.

“The authorities have drawn a line in the sand, asserting that they won’t allow high foreign-exchange volatility or further depreciation; but this strategy would succeed only if trade data starts to improve soon and global risk sentiments remain benign,” Deutsche Bank AG economists, led by Taimur Baig, wrote in a report today. “It is hard to be confident about everything working out as per expectation.”

The rupee weakened 1.8 percent to 60.4850 a dollar today, the lowest level since July 8. The 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 U.S. Federal Reserve indicated May 22 that its asset-buying program could be tapered if the U.S. job market continues to improve.

RBI Measures

The yield on the 10-year bonds due 2023 has surged 81 basis points in July and climbed to 8.42 percent on July 24, the highest for a 10-year benchmark bond since May 2012.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rallied 23 basis points to 9.50 percent, data compiled by Bloomberg show. A weaker currency makes imports costlier and threatens to spur gains in consumer prices, which have climbed at an annual rate of about 10 percent for more than a year.

The RBI 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.

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