Mumbai: The Indian rupee closed higher against the US dollar, paring its losses in the early trade, but bond yields stayed high on Wednesday on speculation that interest rates may stay high for a longer phase if the Reserve Bank of India (RBI) accepts the recommendation of an expert panel to link monetary policy formulation to consumer price inflation instead of wholesale price inflation.
Inflation based on the consumer price index (CPI) has stayed at elevated levels for quite some time and if RBI accepts the recommendation, it could keep rates high until inflation eases substantially, dealers said. In December, the CPI reading was 9.87%, compared with 11.16% in the previous month.
The domestic currency ended at 61.825, up 0.11% from previous close of 61.8913. During the day, the unit fell to 62.015. So far this year, rupee has lost 0.04%.
“The panel’s proposal to link policy formulation to CPI inflation is the trigger that has spiked the bond yields,” said Anup Verma, associate vice-president at DCB Bank Ltd. “Also, a correction was expected in the yields after continuous rally in the past few days,” said Verma.
The RBI committee, headed by deputy governor Urjit Patel, also said short-term bonds like those issued to mop up liquidity or to manage temporary liquidity mismatches be done away with.
RBI is set to announce its third quarter review of annual monetary policy on 28 January.
The yield on India’s 10-year benchmark bond ended at 8.609%, as compared with its previous close of 8.554%. The yield rose to 8.67% in the intra-day. Bond yields and prices move in opposite directions.
The dollar index, which measures the US currency’s strength against major currencies, was trading at 81.097, up 0.02% from the previous close of 81.098.
India’s benchmark equity index, Sensex ended at 21,337.67 points, up 0.41% points its previous close.
