Photo: Mint (Mint)
Photo: Mint
(Mint)

Watch the bond mart

Interest rates in the bond market have reversed direction as FIIs began to pull money out of Indian debt

The steep decline in the value of the rupee this week will make it very difficult for the Reserve Bank of India to cut interest rates in July—despite the rapid fall in core inflation.

Meanwhile, interest rates in the bond market have reversed direction as foreign institutional investors began to pull money out of Indian debt since 22 May. The yield on the benchmark 10-year government bond on Friday was 33 basis points higher than what it was a few weeks ago.

In a sense, the market has already begun to price in higher borrowing costs. What’s more, money market interest rates could climb if the central bank is forced to defend the rupee in the coming weeks by selling dollars. It’s worth noting that overnight call money rates are already slightly outside the policy corridor between the repo and the reverse repo rates.

As the rupee wobbles, watch the bond market as well.

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