MUMBAI: Indian government bond yields rose to their highest in a week on Wednesday as the rupee's continued weakness raised concerns about funding of the country's current account gap.
Interest rate swaps, particularly on the long-end, also rose to three-week highs as crude oil prices and US Treasury yields rose with strong data continuing out of the United States.
The rupee dropped to a 10-month low on Wednesday, primarily on the back of global dollar strength as global markets begin to factor in a gradual tapering off of US quantitative easing, which will hurt fund inflows to emerging economies.
Falling inflation, which eased below 5 percent for the first time in April, has raised hopes that the central bank may again cut rates in June.
But the falling rupee has reignited concerns about the current account deficit, which is also a variable in the policy parameters that the central bank is monitoring.
"Rising crude prices and weakening rupee has threatened the confidence in fiscal deficit consolidation," said Ramana Chegu, head of asset liability management at ING Vysya Bank Ltd, Mumbai.
"In addition, expectations of quantitative easing winding down with higher US Treasury yields implies 'risk-off' sentiment, potentially hurting inflows from overseas investors in equities and bonds," Chegu said.
Bond markets are also worried about the continued liquidity deficit with the central bank yet to announce an open market operation during the week.
The old benchmark 10-year bond closed 3 basis points higher at 7.39 percent. It rose to 7.42 percent earlier in the session, its highest since May 20.
The 7.16 percent 2023 bond, which will be reissued in Friday's auction, closed up 3 basis points at 7.16 percent.
Total volumes stood at an average 579.85 billion rupees.
The five-year swap rate rose to a high of 6.90 percent, its highest since May 10. It ended 4 bps higher at 6.87 percent.
The one-year swap rate ended 1 bp higher at 7.13 percent. It rose to 7.15 percent earlier in the session.
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