India's measures to protect its currency sent government borrowing costs sharply higher at a bond auction on Friday and dealers said the Reserve Bank of India (RBI) appeared to have intervened anew in the forex market in support of the rupee. Earlier, the embattled currency fell close to where it had been before a dramatic rescue mission by the RBI late on Monday, which sent bond yields surging and crimped the growth outlook for Asia's third largest economy.
India's benchmark 10-year bond ended its worst week in four-and-a-half years, with the yield rising 40 basis points, disrupting government debt sales and undermining central bank efforts to mop up liquidity to make it harder to speculate against the rupee. That in turn fuelled expectations of further measures to generate demand for the rupee, such as increasing the level of reserves banks must hold as cash or issuing offshore bonds. "Nobody really expects them to roll back these measures. The issue is whether they do anything further," said Hitendra Dave, head of global markets at HSBC India.
Prime Minister Manmohan Singh said on Friday the steps were temporary and did not signal a rise in long-term interest rates. "Once the short-term pressures have been contained, as I expect they will be, the Reserve Bank can even consider reversing these measures," Singh said, though he conceded the government's forecast of 6.5 percent economic growth in the fiscal year to March 2014 was unlikely to be met. However, some economists say the central bank's efforts increase the risk it may have to raise rates even as India's economic prospects weaken.Private economists have been cutting their forecasts for growth, with Deutsche Bank on Friday slashing its prediction to 5 percent, matching the lowest in a Reuters poll this week.
Bond markets have been in turmoil since the RBI's extraordinary move on Monday to support the rupee by draining cash from the market and pushing up short-term interest rates. A special bond auction on Thursday fell well short of its target.
The partially convertible rupee ended at 59.35/36 per dollar, half a percent stronger on the day. Traders said the central bank appeared to have been repeating its recent late-session practice of selling dollars through state banks. The rupee has been hit especially hard in the recent global sell-off in emerging markets because of a current account deficit that hit a record 4.8 percent of India's gross domestic product