Rupee, bonds witness sell-off as crude oil, US Treasury yields rise | Economy & Policy News

The rupee and government bonds on Thursday came under pressure as a sharp rise in the prices of crude oil and United States (US) Treasury yields dampened market sentiment over inflation risks and expectations of higher global interest rates, according to dealers.

 

The rupee fell 0.23 per cent to settle at 95.96 a dollar, its lowest level in a week, while the yield on the benchmark 10-year government bond rose by 6 basis points to end at 7.11 per cent, its highest since May 21.

 

Short-term bonds saw a bigger selloff with the yield on the benchmark five-year government bond hardening by 8 basis points to settle at 6.82 per cent.

  

Brent crude oil prices moved above $106 per barrel on Friday, rising sharply from below $100 in recent sessions because concerns over supply disruption linked to the Iran conflict have increased.

 

Market participants said dollar sales by state-run banks, likely on behalf of the Reserve Bank of India, limited the fall and kept the currency just below 96.

 

“The RBI had been active around the 96 level, with dollar sales helping contain the rupee’s decline. The 96 level has emerged as an important psychological threshold for the currency,” said a dealer at a state-owned bank.

 

The dollar index was around 101.2, the highest in nearly two months, after the strong US September PMI (purchasing managers’ index) data revived concern over persistent inflation and increased expectations of another Federal Reserve rate increase.

 

“The rupee faced persistent downward pressure, dragged down by softening Asian currencies and a sluggish domestic equity market. Compounding these headwinds, a rebound in crude-oil prices, elevated bond yields, and growing expectations of higher interest rates kept the local currency on the back foot. The near-term momentum for a spot rupee remains resiliently firm. The key level to watch sits at 95.55 for support, with overhead resistance capping the upside at 96.30,” said Dilip Parmar, research analyst, HDFC Securities.

 

The rupee has depreciated by 5.19 per cent since the onset of the Iran-US war, whereas, it has weakened by 0.82 per cent in September so far.

 

The five-year US Treasury yield also moved above 5 per cent after a poorly received Treasury auction, adding to pressures on emerging-market currencies, said dealers.

 

New York Federal Reserve President John Williams said on Thursday that it was reasonable to consider another rate increase before the end of the year to contain inflation risks.

 

“Bonds are tracking US yields and crude oil as cues,” said a dealer at a primary dealership. “From here we expect the rupee move to 7.15 per cent (yield on the benchmark 10-year government bond),” the person added.

 

Asian currencies also weakened, with the Chinese yuan, South Korean won and Indonesian rupiah coming under pressure.

 

Forward premiums also rose as the Reserve Bank of India continued to make payments in the forward market, dealers said.

 

The one-month forward premium rose to 3.57 per cent from 3.20 per cent while the one-year premium increased to 3.44 per cent from 3.22 per cent.