Bond yields track U.S. peers lower, rupee strengthens slightly

Indian bond yields edged lower on Friday, tracking their U.S. peers‘ slide after a bigger-than-expected hike by the European Central Bank (ECB) brought the focus back on a global recession, while the rupee strengthened marginally against the greenback.

India’s benchmark 10-year bond yield was trading at 7.42% by 0455 GMT, after falling earlier to a session low of 7.41%. It had ended at 7.44% on Thursday.

U.S. Treasury yields fell on Thursday, with the benchmark 10-year note below 2.9%, weighed by soft economic data and after the ECB’s first interest rate hike in 11 years turned investors’ focus towards an economic slowdown.

Traders said bond yields have been trading in a tight band amid mixed global triggers and the upcoming monetary policy review in early-August.

India’s partially convertible rupee was trading at 79.88/89 per dollar, compared with its close of 79.9450.

The rupee too has been holding in a tight range in recent weeks amid dollar-selling intervention by the Reserve Bank of India (RBI) to prevent sharp losses.

Most Asian currencies, however, were trading weaker against the dollar after ECB’s action and could pressure the rupee towards 80 levels later in the session, traders said.

Local shares and were both trading up around 0.2% each.

DBS said in a note that despite recent signs suggesting inflation may have peaked, it is too premature to go easy on inflation as a past RBI study has shown that a 5% depreciation in the rupee versus their baseline projection could push inflation higher by roughly 20 basis points and vice versa.

The RBI’s baseline rupee projection was at 76 per dollar as per the monetary policy report published in April.

“This also explains the central bank’s preference to anchor the exchange rate so as not to aggravate supply-side price pressures,” Radhika Rao, an economist with DBS said.

DBS now expects a 35 basis points increase in the key rate by the RBI at its August meeting versus 50 bps earlier.

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