Rupee at 2-month closing high; 10-year yield at 2-yr peak

MUMBAI : The rupee on Monday strengthened to its highest level in nearly two months aided by dollar inflows, while the benchmark 10-year bond yield hit fresh two-year highs as it tracked an uptick in US Treasury yields and global crude oil prices.
The US 10-year treasury yield rose to a two-year high of 1.808 per cent following a mixed jobs report and as investors start pricing in earlier-than-expected rate hikes by the US Federal Reserve.
India’s benchmark 10-year bond yield ended at the session peak of 6.59 per cent, its highest since Jan. 31, 2020. It had closed at 6.54 per cent on Friday.
“Crude oil prices surged by 5 per cent amidst supply constraints despite concerns on the spread of omicron. Absence of demand and risk of excess supply concerns too continue to weigh on markets,” said Upasna Bhardwaj, economist at Kotak Mahindra Bank.
Traders will now monitor the retail inflation data for December due on Wednesday for near-term clues. A Reuters poll expects inflation to have risen to a six-month high of 5.80 per cent last month, compared with 4.9 per cent in November.
The 10-year yield is seen holding in a 6.50 per cent to 6.60 per cent range during the week.
Oil prices edged up on Monday as supply disruptions in Kazakhstan and Libya offset worries stemming from the rapid global rise in Omicron infections.
India imports more than two-thirds of its oil requirements and high crude prices push up its import bill, hurting the rupee while also stoking imported inflation in the country.
Broader emerging market stocks and currencies were also higher after last week’s fall, as investors focussed on Omicron cases and US inflation due data this week.
The partially convertible rupee ended at 74.04/05 per dollar, versus its Friday’s close of 74.3050. The close was the strongest since Nov. 8 and the unit’s 0.4 per cent rise on day its biggest single-day gain since Dec. 30.
Traders expect dollar inflows into domestic share markets and other global bond sales to continue aiding the rupee. It is expected to hold in a 73.80 to 74.80 range in the near term.
The BSE and NSE share indexes both rose 1.1 per cent on Monday.
“We expect the USD strength to continue as the market participants assess the global inflationary pressures and the subsequent pace of policy normalization,” Bhardwaj said.
“However, capital inflows could still continue in India amidst expectations of inclusion in global bond index, helping INR outperform,” she added.

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