Home / Economy / India bonds gain, rupee at 1-month high despite inflation concerns

Indian government bond yields drifted lower today even as data released on Monday showed inflation stayed above the Reserve Bank of India's target for eight straight months. The benchmark 10-year government bond yield was at 7.1473%, after ending at 7.1811% on Monday.  Bond prices and yields are inversely related. Traders attributed the rise in bond prices to foreign investors buying Indian notes on likely inclusion in global indexes.

On the other hand, the Indian rupee surged to more than a one-month high against the dollar as higher-than-expected domestic inflation data stoked expectations for a more aggressive rate hike by the country's central bank. The Indian currency firmed to 79.16 per U.S. dollar, its highest level since Aug 5, compared to the previous close of 79.5225. 

"Rupee appreciated on back of weak dollar and inline CPI data for India which gave a positive impact for the rupee. Along with lower expected data of US CPI to come out later in evening expected at 8.1% compared to 8.5% giving negative rally to dollar as lower inflation data would add less pressure on Fed's to hike rate by 0.75bps and go with 0.50 or even 0.25 in case CPI comes even lower than expectations. Thus rupee has seen a smart rally from 79.70-79.00 in the last 24 hrs. Going ahead rupee is expected to take support of 79.25-75.40 and resistance of 79.00 breaking 79.00 will open room for 78.50-78.60 zones for rupee," said Jateen Trivedi, VP Research Analyst at LKP Securities.

Morgan Stanley said it sees a "good chance" of JPMorgan including Indian bonds in its emerging markets index. Goldman Sachs expects it to happen next year. Investors have been on a buying spree over the last few weeks on bets of Indian government securities likely being included in global indexes.

Data released on Monday showed India's annual retail inflation rate accelerated to 7% in August, snapping a three-month downward trend. The rate came in higher than 6.9% forecast in a Reuters poll of economists and July's 6.71% reading.

The higher inflation reading has prompted some economists to raise their calls for a third consecutive 50 basis-point rate hike later this month. The RBI has hiked key policy rate by 140 basis points in May-August.

“At 7.0% YoY, CPI inflation was higher in August than the 6.7% of July 2022 on account of higher food inflation. Notably, 4 out of 5 months in the fiscal year so far saw a 7%+ print. With the ban on broken rice and 20% excise duty on other categories of rice, the government endeavors to help to bring inflation lower. With significant amount of uncertainty on the inflation dynamics, we expect the RBI to remain front-footed with its rate action and call for a 50bps increase in the repo rate at the September 30 policy. This also sets in well with the hawkishness of major central banks of the world," Yes Bank economists said in a note. 

Traders are also looking for cues from the U.S. inflation data due later in the day, which could guide the Federal Reserve policy decision due on Sep. 21. (With Reuters Inputs)

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