RBI inflation warning hurts  bonds, rupee

Currency falls to two-month low against dollar.

Mumbai : Indian bonds and the rupee weakened on Thursday after minutes of the Reserve Bank of India’s (RBI) February monetary policy meetings showed increased concern among members on the accelerating inflation.

Heavy selling pressure from banks and corporates also pushed down Government Securities (G-Secs).

The MPC members expressed concern about continued inflationary risks, citing factors including high food and global crude prices and the government’s decision to increase spending for the year starting in April to support a struggling agricultural sector.

The 7.17 per cent 10-year benchmark bond maturing in 2028 dropped to Rs 96.06 from Rs 96.30, while its yield edged up to 7.75 per cent from 7.71 per cent.

Meanwhile, Indian rupee took another beating after a brief solace and plunged by a staggering 28 paise to end at a new three-month low of 65.04 against the US dollar even as importers rushed to cover unhedged positions amid fears over an imminent Fed rate hike.

This is the lowest closing of the Indian currency since November 20 last year.

Forex market sentiment was impacted after the FOMC minutes of the latest policy meet cemented expectations that the Fed will hike rates under its new chief Jerome Powell next month and showed more confidence on the economic outlook and increasingly optimistic on reaching their 2 per cent inflation target.

Mounting concerns over a multiple interest rate increases from the US Federal Reserve this year and also overrun by extremely bullish dollar undertone, panic-stricken importers rushed to cover their overseas liabilities as the local unit turned highly volatile in the last few trading sessions.

Meanwhile, state lenders are selling government bonds worth Rs 470 crore on average every day this year, Clearing Corp. of India data showed. Last year, net daily inflows totalled Rs 36.8 crore, and in 2016, the run rate was at Rs 300 crore a day.

Their sale in a market where there’s a paucity of buyers is contributing to a downward spiral, where losses keep worsening. It will be difficult for debt auctions to sail through without participation from the state banks when Prime Minister Narendra Modi’s new borrowing programme begins in April, according to Sandeep Bagla, associate director at Trust Capital Services in Mumbai.

Reverse swing

 Forex market sentiment was impacted after the  FOMC minutes cement- ed expectations that the  Fed will hike rates next               month.

State lenders are selling   government bonds   worth Rs 470 crore on  average every day this   year.