Mumbai: Government bonds and the rupee notched up firm gains Thursday as a lower-than-expected US inflation print lowered the odds of an imminent end to the cycle of rate increases that began late winter last year in the world’s biggest economy. The dollar index that maps the movement of the US currency against other monetary units declined, burnishing the allure of emerging-market assets.
The rupee and Indian bonds rallied despite a higher-than-expected local inflation reading, potentially lengthening the odds the Reserve Bank of India (RBI) will ease rates soon.
The yield on the 10-year benchmark government bond closed at 7.07% on Thursday, five basis points lower than the previous close. Bond prices rise when yields fall. One basis point is 0.01 percentage point. Easing government bond yields drive down borrowing costs for corporates raising funds through debt.
The rupee gained 10 paise to close at 82.08 to the dollar on Thursday. Intraday, the local currency strengthened past the 82 mark for the first time since July 4, touching a high of 81.95.
“The breakdown in the US dollar index to a fresh 15-month low is a major trigger for further appreciation in the Indian rupee. Now, how much will depend on how aggressive the RBI is in its buying of US dollars,” said Anindya Banerjee, vice president-currency derivatives at Kotak Securities.
Currency traders said that the RBI had likely stepped in to purchase dollars once the rupee strengthened past the 82 mark so as to rein in excess volatility in the exchange rate. Banerjee estimated dollar purchases worth around $1 billion by the central bank, spread out between the spot and forwards markets. In the near term, the rupee is seen in a band of 81.60-82.40, traders said.
CONTRASTING DATA
Data released after Indian trading hours on Wednesday showed that India’s headline retail inflation was at 4.81% in June, sharply higher than 4.31% in May. The RBI’s target for inflation is 4% and its tolerance band is 2-6%.
Ordinarily, rising inflation would push up yields on local fixed-income products but data released just after the domestic price data showed that US annual headline inflation was at 3% in June, the lowest since March 2021.
“It is likely that more and more Fed officials turn sceptical of further hikes being needed beyond one more at the July meeting. A continuation of the disinflationary trend makes it likely that the Fed will pause after the July meeting,” Madhavi Arora, economist at Emkay Global said.