RBI's Support for Rupee Brings India Bond Bulls Little Relief
(Bloomberg) -- Bond investors are finding out that the Reserve Bank of India isn’t as generous as they thought.
Sovereign debt declined for a third day Friday, wiping out gains fueled by the RBI’s May 4 decision to inject cash by buying bonds. The measure has failed to revive demand for debt as it simply restores the cash drained by the authority to prop up a sliding rupee, traders say.
“The RBI could do more OMO purchases because of the run on the rupee,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts. The liquidity infusion gets “neutralized” when the central bank sells dollars to buy rupees to rein in the currency’s decline, he said. Sharma said he expects the benchmark yield to hold in the 7.60-7.65 percent range.
Sovereign bonds declined on Friday, with the 10-year yield rising one basis point to 7.73 percent. It climbed 15 basis points over three sessions, reversing declines of a similar magnitude that followed the RBI’s OMO announcement.
India’s rupee has declined 3.2 percent against the dollar this quarter, the most in Asia, as foreigners turned net sellers of local debt and stocks. The weaker currency is adding to inflation risks at a time when prices of oil -- the nation’s biggest import -- have risen to levels last seen when Prime Minister Narendra Modi took power four years ago.
The nation’s foreign-exchange reserves have declined by almost $6 billion in the last two weeks, a sign the RBI intervened to support the rupee.
“We expect the RBI to follow through with more OMOs to replenish liquidity drained from FX intervention and currency outflows,” said Arvind Chari, head of fixed income and alternatives at Quantum Advisors Pvt. “But if the RBI stops OMOs, we could see a much deeper selloff” in bonds, he said.
The open-market purchases announcement, the first since October 2016, adds to the steps taken by the government and the RBI to support the market. These include easing rules for foreigners, trimming debt sales and allowing banks to spread out trading losses.
Yet, the benchmark yield surged 37 basis points in April as hawkish central bank minutes and a flare up in oil prices sparked fears that the RBI will raise rates faster than what most analysts are forecasting.
In fiscal 2017, when the RBI bought bonds worth 1.1 trillion rupees, the benchmark yield fell to a seven-year low. Yields may not cool significantly this time as traders may be reluctant to sell at current depressed levels, according to Anoop Verma, vice president for treasury at DCB Bank Ltd. in Mumbai.
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