India's benchmark 10-year bond yield saw its biggest single-day fall in nearly 20 months on Monday amid a drop in crude oil prices and as global risk-off sentiment prompted investors to cover their short positions.
The rupee fell to a one-and-half month low, tracking falls in the domestic share market and other Asian peers on concerns that Beijing could join Shanghai in a strict COVID-19 lockdown which weighed on Chinese stocks and the yuan.
India's benchmark 10-year bond yield closed trading at 7.04 per cent, down 13 basis points on the day, its biggest single-day fall since Sept. 1, 2020.
"Global oil prices are down, there is a risk-off mode globally, so people are buying bonds. There are some who are targeting 6.90 per cent on the 10-year in the near-term," a senior trader at a private bank said.
Oil slumped to about two-week lows, extending last week's decline, as concern grew that prolonged COVID-19 lockdowns in Shanghai and potentially rising U.S. interest rates would hurt global economic growth and oil demand.
India's domestic share markets tanked more than 1 per cent in line with other Asian peers.
The partially convertible rupee ended at 76.69/70 per dollar, compared to its close of 76.4825 on Friday. The unit dropped to a low of 76.77 per dollar, its weakest since March 9.
"The RBI has so far acted as an effective backstop for the rupee, but we suspect that in extreme risk-off situations it is likely to turn to a strategy of curbing rupee volatility rather than defending particular levels of the rupee," HDFC Bank said in a research note.
"The RBI might want to let market forces play out to some extent, letting the rupee move closer to its fair value, instead of going too strongly against the wind."
Investors are closely monitoring the evolving inflation situation to see how soon the Reserve Bank of India is likely to start raising interest rates.
Almost all members of India's monetary policy committee argued in favour of action to curb inflationary pressures at their April 6-8 meeting despite continuing risks to economic growth, minutes released after market hours on Friday showed.
"Overall, we felt that the tone expressed in the minutes was not as hawkish as the comments in the post-policy conference suggested and could perhaps be interpreted as the MPC not yet signaling an aggressive rate hiking cycle," said Rahul Bajoria, chief India economist at Barclays.
"However, given that the minutes were drafted before the March CPI data, they may not completely capture the most current reaction function," he added.
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