Rate fears rattle Indian bonds, Rupee crashes

Rate fears rattle Indian bonds, Rupee crashes

BOMBAY (Reuters) - Indian bond yields spiked to near 11-month highs amid a broad sell-off on Monday after the central bank chief said authorities would review the soft monetary stance if global rates rose faster than expected.

The rupee , hit by dwindling dollar inflows from foreign investors, exporters and expatriates, closed at its lowest level in seven months, after dropping half a percent.

The 30-issue Bombay Stock Exchange index closed 0.66 percent down at 4,738.62 points.

Bank issues led the decline as investors fretted that bad loans may rise if banks were obliged by the new left-leaning government to lend more to farmers. Worries that higher rates could hit their bond trading profits also dampened the mood.

Federal bonds were the worst hit as sentiment, already weakened by a jump in inflation on Friday, buckled on bearish comments made by the Reserve Bank of India Governor Y.V. Reddy in an interview published in the Hindu daily.

The 10-year benchmark bond's yield ended nearly 13 basis points higher at 5.5946 percent, a level not seen since July 31, when it closed at 5.6137 percent.

"The market was already in a cautious mood amid worries over inflation and the governor's comment about the need to 'revisit' rates only heightened the rate-related fears," said S.P. Prabhu analyst at IDBI Capital Market Services Ltd.

India's central bank left interest rates at three-decade lows in May but said it would keep an eye on domestic inflation and global rate trends, prompting many analysts to say it had switched to a neutral policy stance.

Investors now fear that higher fuel prices in one of the world's fastest growing economies may stoke inflationary pressures, and along with a global monetary tightening, force the central bank to raise interest rates earlier than expected.

RUPEE, STOCKS WEAKEN

The Indian currency closed at 45.9000/9300 per dollar, its lowest close since 45.9250/9300 on November 25. The rupee has now weakened by more than two percent over eight sessions.

"Investment inflows have thinned and exporters are holding on to their remittances, anticipating more weakness in the rupee," said a trader at a state-run bank.

"There are no signs of central bank intervention. The rupee should fall past the 46 per dollar mark tomorrow. This nervousness should last at least till the budget."

Financial markets are waiting for the new Congress-led coalition's maiden budget on July 8. The budget for the fiscal year to March 2005 is expected to include details on the new government's plans to spur growth and investment into Asia's third-largest economy.

Banks slid on fears that Finance Minister P. Chidambaram's plans to increase credit to the farm sector by some 30 percent this year could lead to a higher exposure to sticky loans.

The country's largest commercial bank, State Bank of India lost 4.9 percent while Bank of Baroda, another large state-run lender, fell 5.4 percent.