Bond yield touches 18-month high, oil prices pull rupee down

Rising oil prices have pulled the rupee down while bond yields hit 18-month high

Indian bond yields hit their highest level in nearly 18 months, while the rupee fell to its lowest level since July 2020, as a sharp rise in global oil prices raised concerns about its impact on domestic inflation.

India imports 80 per cent of its oil needs and higher prices result in increased imported inflation and its impact on prices in other regions.

The Reserve Bank of India in its policy review on Friday lowered its full-year inflation forecast to 5.3 per cent from 5.7 per cent but looked cautious about the impact of higher global crude oil and other commodity prices on inflation.

A senior dealer of a private bank said, “Crude oil continues to rise and till we see some relief there, rupee and bonds will remain under pressure. It needs to be seen whether RBI comes to protect the rupee or not. “

The partially convertible rupee closed at 75.3550/3650 per dollar after touching 75.3950, its weakest since July 14, 2020. On Friday it closed at 74.9850.

The rupee will target a return to close above 75.81 per dollar at 76.92 which was a record low, a Reuters market analyst wrote on Monday.

Oil prices rose 2 per cent, marking multi-week gains as major economies hit by the energy crisis showed no signs of easing amid a pick-up in economic activity and supply curbs from major producers.

Traders said US bond yields hitting a multi-month high on Friday also weighed on local bond sentiment.

India’s benchmark 10-year bond yield closed at a session high of 6.34 per cent, the highest level since April 17, 2020. The yield ended Friday at 6.32 per cent.

Analysts said the RBI’s decision to not continue with its government securities acquisition program for the third quarter and instead resort to ad-hoc bond purchases would also put pressure on long-term yields in the near future.

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