Bond Yields Rise, Rupee Weakens As RBI Begins Normalisation

The benchmark 10-year government bond yield rose to the highest in over an year, while the the Indian currency fell to a six-month low after the Reserve Bank of India signaled the beginning of the normalisation process.

The 10-year India government bond yield rose to 6.31% in afternoon trades. The rupee breached the 75 mark against the U.S. dollar.

The Monetary Policy Committee on Friday voted unanimously to keep the policy repo rate unchanged at 4%. The reverse repo rate, set by the Reserve Bank of India, was unchanged at 3.35%. However, the RBI stepped up the pace of variable rate reverse repo auctions and decided to discontinue further G-SAP operations at this juncture.

"The plan is to reduce the surplus system liquidity from the current high levels to around Rs 2-3 lakh crore by the end of the current quarter," said Suman Chowdhury, chief analytical officer at Acuité Ratings & Research.

Although the RBI clarified that these measures can’t be construed as liquidity tightening measures, "we believe these are early steps towards the normalisation of the highly accommodative policy", he said.

In the currency markets, analysts attributed the weakness in the rupee to global factors rather than domestic developments. However, the rupee was the worst-performing currency among Asian peers Friday, weakening 0.35%. Over the past one week, the rupee has weakened 1.24%.

Samir Lodha, founder at QuantArt, said that the weakness of rupee is expected to persist as the dollar's move higher is not over yet. "The rupee crossing 75 is more a function of emerging markets currency selloff rather than the policy," he said.

Imran Kazi, vice president at Mecklai Financial, also said that the monetary policy had little to do with the rupee's weakness. The rupee's weakness is pretty much along expected lines, Kazi said.

Lodha estimated that the rupee could breach 77-78 in the next few months.