INR: Rupee Firms Moderately Following RBI Hold, 10-Year Yields Fall 5bps

USDINR (-0.11%) pulled back moderately following the RBI rate decision – albeit spot remains within range of recent record highs – after the central bank kept both the 5.50% repo rate and its neutral stance intact. According to Reuters, the 88.80 level has become a new “soft line in the sand” on RBI interventions, and the central bank was likely active in the early hours of Wednesday trade ahead of the rate decision.

• 24 out of 39 analysts surveyed by Bloomberg expected no change to rates, while 15 expected a 25bp reduction. However, even of those anticipating a hold, many noted that there was scope for an adjustment given concerns over India’s weakening growth prospects. In the end, uncertainty over the tariff situation and rupee weakness were likely the main reasons justifying the unanimous decision to keep rates unchanged, while the neutral stance provides flexibility for future adjustments in either direction.
• Moves in Indian bond markets have been more significant than that in the currency market, with the 10-year currently around 5bps lower – its largest intraday decline since late August. Commenting on the 10-year yield, Governor Malhotra said “We feel that it should head downwards.” His comments follow a sharp move higher in yields since the June meeting, at which the central bank unexpectedly changed its stance to “neutral” from “accommodative”.
• Last week, authorities announced that India will scale back the issuance of longer-maturity bonds over the next six months amid waning demand, in a move which some analysts say may spur a rally in longer-tenor bonds. It remains to be seen whether further measures will be taken to shore up the market.