Karnataka election blast hits rupee, pushes Indian currency below Rs 68 level vs US dollar

The yield on the benchmark 10-year bond ended at 36-month high Tuesday as the local currency depreciated beyond Rs 68/$1 after Bharatiya Janata Party (BJP) failed to secure a simple majority in Karnataka state elections to form a government, dealers said. The yield on the benchmark 10-year bond was at 36 months high ending at 7.90%. This was the highest level since May 15, 2015, compared to 7.82% at the previous close. Bonds had opened down after India’s core inflation surged to a 44-month high of 5.9% in April amid a sharp rise in oil prices above $78 per barrel. Brent forward futures for July delivery traded 0.98% higher at $79 per barrel at the close of trade on Tuesday.

According to dealers, if international crude oil prices jump beyond $80 per barrel in the overnight trades, 10-year yield could test 8% today. Bond was hit as oil prices surged to over four-year high of $79 per barrel, dealers said. The rupee plunged sharply to end at Rs 68.09/$1, its highest level since January 24, 2017, compared to Rs 67.51/$1 at the close of the previous session. The local currency opened lower at 67.68 from overnight level of 67.51 at the Interbank Foreign Exchange (Forex) market.

“The 10-year bond yields may climb above 8% as the market starts to factor in a possible rate increase,” DBS economist Radhika Rao said. “Shorter-tenors are increasingly factoring in the likelihood of a tighter policy stance. Expectations are for the Reserve Bank of India (RBI) policy panel to veer towards a hawkish stance in June and pave the way for a 25bp increase in August,” she further said.

Oil prices hit a three-and-a-half year high on Tuesday, supported by tight supply and planned US sanctions against Iran that are likely to restrict crude oil exports from one of the biggest producers in the Middle East.

“After looking at the sharp slide in rupee near closing time, bonds also crashed to day’s low. Oil is also going towards $80 per barrel and it is bad,” said a dealer with a foreign bank.

Brent crude oil reached $79.22 a barrel, up 99 cents and its highest since November 2014. World oil prices have surged by more than 70% over the last year as demand has risen sharply but production has been restricted by the Organisation of the Petroleum Exporting Countries, led by Saudi Arabia.

Adding to this, local stocks ended flat, paring all the gains made during earlier trends of election results. The 30-share Sensex hit a high of 35993.53 in morning trade. Later, it met with profit-booking at higher levels and slipped in the negative zone to hit a low of 35,497.92, before settling 12.77 points or 0.04% to 35,543.94. The gauge had gained 310.44 in the previous two sessions.

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The 50-share Nifty reclaimed the key 10,900-mark to touch a high of 10,929.20 in initial trade and fell back by 4.75 points or 0.04%, to end at 10,801.85. It touches a low of 10,781.40.

According to reports, BJP has won 104 seats, Congress 78 seats, JDS 38 seats while two seats were won by independent candidates.

Source: DNA Money (Agencies)