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Rupee, bonds gain on 'less hawkish' policy despite US Fed rate hike

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Fed Chair Powell's comments suggest slower pace of hikes going ahead, say markets

money, budget, rupee

 bonds and the  strengthened on Thursday despite a 75-basis-point (bp) rate hike by the  as key aspects of the central bank’s commentary were perceived as indicating that future policy tightening may occur at a slower pace in the world’s largest economy.

At 9.30 am IST, the  was trading at 79.78 per US dollar, stronger than 79.90 to a dollar at previous close. A sharp rise in domestic stocks also boosted the rupee, with the BSE Sensex and the NSE Nifty both trading 1 per cent higher.

Yield on the 10-year benchmark 6.54 per cent, the 2032 government bond was at 7.31 per cent, three bps lower than Wednesday’s close. Bond prices and yields move inversely.

Also Read: Indian diaspora, global bankers may profit from New Delhi's dollar crunch

Late Wednesday, the  announced a 75-bp rate hike, taking its benchmark policy rates to 2.25-2.50 per cent. The latest move takes the total tally of rate hikes announced by the US central bank so far in 2022 to 225 bps.

While the US central bank reiterated its commitment to reining in 40-year high inflation in the US, markets took comfort from US Fed Chair Jerome Powell’s assessment that as the stance of monetary policy tightens further, “it may become appropriate to slow the pace of (rate) increases.”

The aggressive pace at which the US Fed has raised interest rates thus far in 2022 has been a key reason behind the large-scale exodus of foreign funds from Indian equities as investors have preferred improved returns in the US. FPIs have net sold $28.6 billion worth of Indian stocks so far in 2022, the largest outflow so far on record, NSDL data showed.

As a result, the  has faced considerable pressure versus the dollar this month, weakening to a lifetime low of 80.06 per dollar on July 19.

“The markets consequently cheered the indication that the biggest rate hikes of this cycle were over,” economists from ICICI Securities wrote.

US bond yields fell sharply after the Fed’s statement, with the 10-year yield declining 5 bps to a three-and-a-half-month low of 2.73 per cent, while the five-year yield dropped 7 bps to 2.97 per cent.

The  index, which earlier this month had climbed to a 20-year high of 108.54, declined as well. The index was last at 106.31 as against 107 around 5 pm on Wednesday.

Lower US bond yields make Indian debt more attractive for foreign investors.

“Domestic government bonds have rallied in line with the OIS (overnight indexed swap) market. The swap curve has steepened as short-term swaps have fallen sharply on view that the Federal Reserve will now be data dependent instead of providing clear forward guidance of rate hikes,” ICICI Securities Primary Dealership’s Head of Trading Naveen Singh said.

With the  (RBI) said to have been strongly defending the rupee whenever it approaches 80 per dollar, currency traders said the domestic currency would likely stabilise after the recent bout of volatility.

“So far,  has kept a strong hold on USD/INR above 80 levels and curbed rupee depreciation. Also, the unwinding of the open interest position yesterday didn’t move the rupee much as the  might have intervened heavily to avoid a sharp move as seen in the June expiry,” wrote Amit Pabari, managing director of CR Forex Advisors.

Also read:- As credit demand grows in India, banks may soon be scrambling for deposits