(Nov 12): India’s central bank is supporting the currency and bond markets as delays in reducing harsh US tariffs hurt local assets.
In recent days, the Reserve Bank of India has signalled unease with investors pushing for higher government debt yields, while data suggests it has bought about US$2 billion of bonds to keep borrowing costs down. At the same time, it is estimated to have sold about US$20 billion in dollars from its reserves to stop the rupee from sliding to new lows.
The RBI is trying to hold the line while Asia’s third-biggest economy faces one of its toughest external shocks in years. Governor Sanjay Malhotra, who had mostly taken a hands-off stance since taking office in December, is signalling to investors that the central bank has drawn a red line, a point beyond which it won’t allow the currency or yields to be pushed.
The RBI’s actions could be “aimed at preventing the rupee from weakening to new levels because of an issue that could be resolved soon”, A Prasanna, chief economist at ICICI Securities Primary Dealership Ltd, said, referring to the ongoing trade talks. On bonds, “clearly there’s concern from the government and the RBI” regarding high borrowing costs for longer-term debt, he said.
An RBI spokesperson didn’t reply to an email seeking comment on the central bank’s intervention strategy.
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For India, the situation is clear: the rupee is Asia’s second-weakest currency this year, bond markets are struggling with heavy government debt supply and local stocks are lagging behind regional indexes which are hitting record highs. The strain has worsened as US tariffs — the highest in the region — choke exporters’ earnings and curb dollar inflows.
A breakthrough on tariffs could turn things around. HSBC Holdings plc estimates that lowering US duties to 20% from 50% could lift India’s growth by half a percentage point — enough to spark a rally across asset classes, economists including Pranjul Bhandari wrote in a note. Societe Generale SA and Goldman Sachs Group Inc expect Indian assets to rebound next year as growth stabilises and trade relations improve.
US President Donald Trump this week said the US was getting “pretty close” to a trade deal with New Delhi, the latest sign of a possible thaw in the dispute that has soured the relationship between the two nations.
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For now, the RBI’s actions seem to be aimed at buying time until a pact is finalised, analysts said. The strategy is working. HSBC strategists say that the central bank’s strong defence has improved the “risk-reward” for holding the rupee, while Barclays plc calls the 89-to-the-dollar mark its “line in the sand”. The local currency closed at 88.5675 on Tuesday (Nov 11).
Meanwhile, the 10-year yield could drop below 6.40% if the authority were to cut rates next month to support the economy, ICICI Securities’ Prasanna said. The yield ended at 6.48% on Tuesday.
Bloomberg Economics estimates that the central bank likely net sold over US$20 billion during the two months to October in the spot market. The dollar sales crimped rupee liquidity just as loan growth was starting to recover, likely prompting the RBI to buy bonds in the secondary market and inject cash into the system.
A category called "others" — which includes the RBI — bought INR205.5 billion of bonds last week, the most since February 2021, according to data from Clearing Corp of India compiled by Bloomberg. Official RBI data on its market activity is due this Friday.
Analysts at Kotak Mahindra Bank Ltd and Aditya Birla Sun Life AMC Ltd expect the RBI to buy about one trillion rupees of bonds in the coming months. The central bank has used large debt purchases earlier this year to boost liquidity in the banking system.
“Banking system liquidity has also tightened from its peak,” opening up room for the RBI to intervene via open-market purchases, said Aditya Bagree, head of markets at Citi India in Mumbai.
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