Indian Bonds, Rupee Fall as Oil's Drop Spurs Outflows Before Fed

Updated on
  • Global funds cut India holdings this month by 8 billion rupees
  • Central bank warns it will intervene in derivatives market

Indian bonds and the rupee fell this week as a combination of a pending U.S. interest-rate increase and slumping oil curbed risk appetite, prompting investors to offload local assets.

Global funds cut Indian bond holdings by 8 billion rupees ($120 million) this month through Dec. 10, adding to November’s biggest outflow in six months. The deterioration in oil prices will  hurt investment amid slowing global growth, according to Edelweiss Financial Services Ltd. Indian primary dealers bought unsold government bonds at an auction for the second straight week on signs investors sought higher yields.

“Markets will be volatile in the run up to the Fed decision due next week,” said Debendra Dash, a Mumbai-based trader at DCB Bank Ltd. “Higher yields demanded by traders probably led to the RBI not accepting the bids.”

The 10-year yield climbed two basis points from Dec. 4 to 7.77 percent in Mumbai, according to prices from the Reserve Bank of India’s trading system. The rate rose to as high as 7.81 percent during intraday trading, the highest since Aug. 26. The central bank purchased 100 billion rupees of debt on Monday in its first open-market operations since January 2014 to try and support the market.

The rupee depreciated 0.3 percent from Dec. 4 to 66.8925 a dollar, prices compiled by Bloomberg from local banks show. The RBI will intervene in the exchange-traded derivatives market "if required” as it seeks to manage volatility in the rupee, according to a statement Wednesday. The currency weakened more than any other in Asia last month.