Indian 10-year bond yield hits 28-month low, rupee edges higher after US Fed hints rate cut in September

Indian government bond yields dropped on Thursday, with the benchmark yield hitting a 28-month low, while the rupee appreciated slightly against the dollar after the US Federal Reserve’s dovish commentary.

The benchmark 10-year yield was around 6.9137% compared with its previous close of 6.9255%. Earlier in the day, it fell to 6.9045%, the lowest level since April 5, 2022.

The drop in Indian bond yields followed the overnight fall in US Treasury yields, with the 10-year US bond yield slipping to 4.03%, its lowest level in six months after Fed Chair Jerome Powell said that a “rate cut could be on the table” at the September meeting, citing easing price pressures.

The US Federal Reserve kept the key interest rates unchanged at 5.25% - 5.50% on Wednesday noting further progress towards its 2% inflation target.

Investors have now priced in 75 basis points of rate cuts in 2024, split equally over the remaining three policy meetings in September, November and December, according to the CME FedWatch tool, Reuters reported.

Meanwhile, Indian rupee rose tracking strength in its Asian peers and amid broader weakness in the greenback after Powell’s remarks.

Rupee traded at 83.70 against the US dollar, compared to its previous close of 83.72. The local unit had depreciated to a record low of 83.745 on Wednesday.

The dollar index, which gauges the greenback’s strength against a basket of six currencies, declined 0.13% to 103.96.

“This combination of dovish signals and disappointing employment numbers sent the DXY tumbling to 103.92, while the US 10-year yields inched down to 4.0320%. Major commodities also appear to have hit a bottom, intensifying the downward pressure on the DXY. With these forces in play, the bearish trend in the DXY seems likely to persist, with short-term movements potentially dipping towards 103.65 and mid-term projections eyeing around 103.20,” said Amit Pabari, Managing Director at CR Forex Advisors.

He believes the market remains cautious and rising geopolitical tensions in the Middle East are likely to cast a shadow over the rupee. Adding to this, the RBI’s restrictions on purchasing 14-year and 30-year government bonds might prompt Foreign Institutional Investors (FIIs) to pull back, putting additional strain on the rupee.

According to him, any dips in the USDINR pair below the 83.50 level are expected to be short-lived and the pair appears set for a range-bound movement, likely oscillating between 83.50 and 83.90 in the near term.

(With inputs from Reuters)

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