Dwindling central bank support for Indian rupee, bonds spooks markets

MUMBAI: The recent selloff in the rupee and government bonds points to waning signs of central ‌bank support, four bankers said, potentially exposing markets to sharper swings spurred by the Middle East war.

Indian government bonds plunged on Monday, with the 10-year yield jumping 15 basis points to the highest in more than a year. The yield did not dip much a day later despite ​some pullback in crude prices.

This is in contrast to the first three weeks of the Iran war, when the ​benchmark yield rose only about 7 bps despite surging oil prices.

The rupee, which hit a record ⁠low of nearly 94 per dollar on Monday, recovered slightly on Tuesday but bankers worry about further losses from a ​foreign exodus and demand in the non-deliverable forward market.

Until last week, the currency had been holding around the 92.50 level with ​support from the Reserve Bank of India, but a breach of that level has intensified depreciation pressure, bankers said.

The RBI has scaled back intervention in the currency and bond markets in recent sessions, said Mandar Pitale, head of treasury at SBM Bank (India), adding that the central bank has ​already deployed $16 billion-18 billion this month.

India’s foreign exchange pile eased over $19 billion to $709.76 billion as on March 13, according to latest ​data.

RBI HELP PETERS OUT

To be sure, the RBI has played a significant role in supporting the rupee and bonds amid a broader risk-off ‌shock triggered ⁠by the Iran conflict, which has driven a surge in oil prices.

Since the conflict began on February 28, the RBI has purchased 1.77 trillion rupees ($18.9 billion) of bonds through March 13, the latest date for which official data is available.

Buying from an investor category that includes the central bank has also dropped since then, data from the clearing house shows.

In the FX markets, ​the central bank has intervened ​across spot, forwards and non-deliverable ⁠forwards, according to bankers.

However, over the past three sessions, the RBI has adopted a more passive approach to FX intervention, a banker at a state-run bank said, selling on the interbank ​system to absorb dollar demand and marking a shift from past efforts to defend specific ​levels, he added. ⁠The banker requested anonymity as he is not authorised to speak to the media.

There is a shift in the fundamental view about the economy’s growth-inflation-current account mix, which warrants rupee weakness, said Dhiraj Nim, economist and FX strategist at ANZ.

“The scale of the shock ⁠is large, ​which means burning FX reserves to defend any particular level of the exchange ​rate may not be prudent. Higher yields are also the natural market outcomes in such a scenario.”