Indian bonds hit a three-week low after the rupee fell to a record low

India’s government bond fell to a three-week low on Friday after the rupee hit a new record low, undermining risk appetite and fueling a broad sell-off in the debt market.The benchmark 10-year yield ended at 6.5665%, the highest level since October 31. During the previous session, the interest rate stood at 6.5324%.

Bond yields move in the opposite direction to prices.
The Indian rupee fell to a new record low in the biggest single-day decline since May, battered by portfolio outflows, uncertainty over a US-India trade deal and a pullback in the central bank’s defense of a key level.

The South Asian currency fell to an all-time low of 89.49 against the US dollar.

Following the rupee’s decline, the 10-year yield closed above the strong technical resistance level of 6.55% for the first time since October 30, raising fears that the breakout could lead to further bond selling. “A weaker rupee could lead to higher returns as the currency risk premium rises – investors demand higher returns to compensate,” said Kunal Sodhani, vice president at Shinhan Bank India. The market had firmed in the first half of the session after a The better-than-expected close at the weekly debt auction reinforced expectations of core investors returning to the segment in the long term.The Reserve Bank of India sold bonds worth 300 billion rupees during the day, including a nearly 50-year bond for which the closing yield was set at 7.3889%, below traders’ estimate of 7.41%.

Market participants are now on edge and are closely watching the development of the long-delayed US-India trade deal.

PRICES

Indian overnight index swap (OIS) yields rose across maturities after a weaker rupee triggered a sell-off in the bond market.

The one-year OIS rate rose 2 bps and the two-year rate rose 1.5 bps, both ending at 5.48%. The liquid five-year rate rose by 1.5 basis points to end at 5.7725%.

(JAS