Rising crude prices and US yields undermine India's bond and currency stability

India’s bond market and currency came under pressure on Tuesday amid rising crude oil prices, US Treasury yields, and a softening rupee, prompting central bank interventions to stabilise markets.

Pressure returned to India’s bond market on Tuesday as a jump in crude prices, firmer US Treasury yields and a softer rupee combined to push borrowing costs higher. Bloomberg reported that the sell-off extended across rates and foreign exchange, with traders also watching the Reserve Bank of India’s latest steps to manage liquidity and currency volatility.

India’s benchmark 10-year government bond yield rose 3 basis points to 6.84%, after gaining 5 basis points on Monday. The five-year yield also climbed 3 basis points to 6.46%, taking its increase this week to more than 10 basis points. Broader Asian bond markets were also weaker as investors responded to higher US yields and renewed concern that energy costs could keep inflation sticky.

The currency market remained under strain as well. The rupee weakened 0.1% to 95.67 against the dollar, with traders saying the RBI sold dollars both onshore and offshore to steady the unit. That support follows the central bank’s decision to end its FCNR(B) scheme early, a programme that had drawn more than $52 billion in inflows and helped bolster foreign exchange reserves, according to market participants cited by Bloomberg.

Goldman Sachs has closed a short Thai baht-rupee trade that it says had delivered a modest gain of about 1%, and strategists there now see the dollar-rupee pair trading in a 94 to 96 range. Foreign investors also remained net sellers on 17 August, pulling money from Indian equities and government debt even as state-owned banks bought bonds, underscoring how sensitive local markets have become to global oil prices, US rates and capital flows.