India 10-year yield at 2-year high; rupee weakens after Fed minutes

By Swati Bhat

MUMBAI (Reuters) - India's benchmark 10-year bond yield rose to a fresh two-year high on Thursday, after the U.S. Federal Reserve's meeting minutes raised expectations for a swifter-than-expected unwinding of monetary stimulus and rate increases.

A "very tight" job market and unabated inflation might require the Federal Reserve to raise interest rates sooner than expected and begin reducing its overall asset holdings as a second brake on the economy, U.S. central bank policymakers said in their meeting last month.

The benchmark 10-year bond yield was trading at 6.54% at 0736 GMT, after touching 6.55% in early trade, its highest since Jan. 31, 2020.

"Bond yields are expected to drift up on the back of a high borrowing programme, tightening policy bias necessitated by sticky inflation and firmer global rates," said Radhika Rao, economist at DBS Bank in Singapore.

On the domestic front, the Reserve Bank of India (RBI) has said it was unlikely to be influenced by global policy actions but concerns have risen over the need to tighten policy to rein in inflationary pressures.

Consumer prices in November rose 4.91% from the same month last year, speeding up from October's 4.48% but lower than the consensus forecast of 5.10%, data showed last month. December inflation due next week and will be the latest data ahead of the RBI's February policy meeting.

Traders expect the central bank to hold the repo rate but are yet again starting to price in an increase in the reverse repo rate and possible withdrawal of rupee liquidity from the banking system.

The partially convertible rupee was trading at 74.39/40 per dollar compared with its close of 74.36 on Wednesday. It fell to as much as 74.51, tracking losses in the domestic share market but dollar inflows towards Reliance's dollar bond helped limit the downside.

Reliance Industries Ltd has raised $4 billion in U.S. dollar bonds, in the country's largest ever foreign currency bond deal.

Bonds were supported by a halt in rallying oil prices and are expected to trade in a 6.52% to 6.55% range for the day.

Oil prices lost ground on Thursday, falling more than $1 a barrel from their highest levels in more than a month after U.S. fuel stockpiles surged amid declining demand. [O/R]

(Reporting by Swati Bhat; Editing by Jacqueline Wong)