Indian one hundred rupee banknotes are arranged for photograph in India. (Photographer: Dhiraj Singh/Bloomberg)

India Bonds Rally After Central Bank Holds Rates in Surprise Move

(Bloomberg) -- India’s rupee declined and stocks entered a correction after the central bank kept interest rates unchanged, surprising investors who expected the authority to step up its defense of Asia’s worst-performing major currency.

The Reserve Bank of India held the repurchase rate at 6.5 percent, a decision forecast by just nine of 49 economists in a Bloomberg survey, and changed its stance to “calibrated tightening” from neutral, signaling more increases lie ahead.

The pause after back-to-back hikes since June puts the central bank behind counterparts in Indonesia and the Philippines, which have taken aggressive steps to support their currencies amid an emerging-market rout triggered by higher U.S. rates and a stronger dollar. Soaring oil prices and the tumbling rupee have pushed India’s benchmark yields to near a four-year high and erased more than $300 billion in value from equities since August.

“The decision to keep rates unchanged when the rupee is touching fresh lows raises a lot of questions,” Gaurang Shah, chief investment strategist at Geojit Financial Services Ltd. in Mumbai, said by phone. “The macro environment remains challenging and the persistent pressure from oil prices raises doubts over the sustainability of any recovery.”

The S&P BSE Sensex tumbled 2.3 percent at the close, the most since February. The gauge has slumped about 12 percent from its August record. The rupee slid to a new record low, falling past the 74 to a dollar mark, before closing down 0.3 percent to 73.7650. The 10-year yield fell 13 basis points to 8.03 percent.

India Bonds Rally After Central Bank Holds Rates in Surprise Move

Mumbai-based traders said that the state-owned lenders likely stepped in on behalf of the RBI to stem the rupee’s slide after the policy decision.

“The unchanged decision suggests that the RBI is not overly concerned about rupee depreciation,” said Mitul Kotecha, a senior emerging-markets strategist at TD Securities in Singapore. “The initial reaction in bonds will be positive but yields will likely struggle to move below 8 percent.”

The currency’s fall has been moderate compared with its emerging-market peers, and in real effective exchange rate terms, the decline has been five percent, Governor Urjit Patel told reporters in a post-policy briefing.

Still, the expectation was the RBI would give some weight to the argument of supporting the currency to curb future inflationary pressures, according to Prakash Sakpal, an economist at ING Bank NV in Singapore.

“Such a policy backdrop, I think, could crush the rupee further and now I even see my 75 USD/INR forecast for the year-end may need further upward revision,” he said.

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