India’s bonds pared losses as some investors bet that concerns about inflation accelerating, which pushed up yields to a two-year high, are overdone.
Benchmark 10-year yields rose to the highest since February 2016 after the minutes of the central bank’s policy meeting showed most of the six members of the monetary policy panel turned hawkish at the February 6-7 review, even as they kept rates on hold. One member voted for a hike, while another gave up a call for a cut, dashing speculation the central bank would ease policy.
Losses narrowed later in the session as high yields likely lured buyers, said Anoop Verma, vice president for treasury at DCB Bank in Mumbai.
“Indian macro picture is not that bad to deserve this kind of a negative response,” he said, referring to the sell-off that’s entered its seventh month.
Earlier, the RBI minutes spooked the market where state-owned banks, the largest buyers of government debt, have turned net sellers after being hurt by portfolio losses. With no local interest and foreigners hemmed in by limits, demand for debt has dried up.
“Underlying hawkishness is more pronounced in the minutes compared to the monetary policy committee statement,” Teresa John, an economist at Nirmal Bang Equities Pvt. in Mumbai, wrote in a note. “While the RBI seems to be buying time, with both growth and inflation on a rising trajectory, we continue to expect a rate hike in FY19, which could come as early as June.”
Ten-year bond yields climbed as much as 11 basis points to 7.82 per cent, the highest level since February 2016, before closing 3 basis points higher at 7.74 per cent. The rupee slid as much as 0.5 per cent to 65.1025 to a dollar, breaching the 65 level for the first time since November. It closed 0.4 per cent lower at 65.0450 to a dollar.