Mumbai:The rupee fell past the 73 mark and bond yields climbed over 12 basis points on Wednesday after crude oil surged to nearly $85 per barrel, a near four-year high.
The rupee ended at 73.34 to a dollar, down 0.58% from its Monday’s close of 72.91. The home currency opened at 73.25 per dollar and touched a fresh low of 73.42 in morning trade. On Tuesday, markets were closed on account of Gandhi Jayanti.
The 10-year gilt yield closed at 8.112%, up over 12 basis points from its previous close of 7.988%. Bond yields and prices move in opposite directions.
Traders were concerned that a rise in US interest rates and expensive oil could lead to fiscal slippage, increase inflationary pressures and raise the chances of the Reserve Bank of India (RBI) increasing interest rates in its monetary policy review later this week.
“A stronger dollar along with soaring oil prices have magnified the rupee decline. Respite is unlikely in the short term, as official supportive action (by way of liquidity boost, likely rate hike support on Friday) is being overwhelmed by global risk catalysts," said Radhika Rao, economist at DBS Bank Ltd.
Aditi Nayar, principal economist of ICRA, expects higher crude oil prices will continue to exert pressure on the rupee and it will trade in the 73-74 range in the near term.
Analyst see an upside to crude prices, given a tightening of the global oil market amid an expected reduction in oil exports from Iran due to US sanctions, persistent decline in Venezuelan production, and a slowdown of growth in US output due to mid-stream bottlenecks.
“With crude prices likely to remain (high), we reiterate our concerns on the Indian macro (situation), especially on the deteriorating external sector balance, upside risks to inflation, risks of fiscal slippage, and rupee depreciation," Kotak Economic Research said in a report on 27 September.
Edelweiss Securities expects that external headwinds in the form of surging crude prices and a depreciating rupee continue to be key concerns for the bond markets.
Traders are now cautious and are awaiting the RBI’s bi-monthly policy on Friday. Of 15 economists surveyed by Mint, 14 expect the RBI to raise the repo rate, the rate at which it lends to commercial banks, to 6.75%. One economist expected a 50 basis point hike to 7%.
So far this year, the rupee has declined 12.07% and foreign investors have sold $2.01 billion and $7.11 billion in the equity and debt markets, respectively.