The rupee fell for a third straight quarter against the dollar, while the benchmark 10-year bond yield surged for a fourth straight quarter as concerns over persistent inflation and continued foreign capital outflows weighed on it.
Rate hikes by the Reserve Bank of India to curb inflationary pressures and persistently high global crude prices also weighed on bonds and the rupee.
The rupee depreciated 4.2% in the June quarter, the sharpest drop since the outbreak of the virus in the March 2020 quarter.
Global crude oil prices soared after Russia invaded Ukraine, pushing up global commodity prices and inflation.
The rupee is also hurt by the country’s trade and fiscal deficits expected to widen this year as India imports more than two-thirds of its oil needs.
“While the RBI’s aggressive use of foreign reserves has dampened volatility, depreciation pressures continue due to numerous global factors and few domestic factors,” analysts at QuantEco Research wrote in a note.
The spread between the two countries is expected to widen and prompt outflows from Indian markets as the Federal Reserve is expected to raise interest rates sharply to curb inflation.
India’s benchmark 10-year bond yield settled at 7.45%, down 1 basis point on the day. The 10-year Treasury yield rose 61 basis points in the June quarter, its biggest quarterly gain since December 2017. Yields rose a combined 79 basis points in the first three quarters.
“Looking ahead, yields are likely to continue to reflect risk premia with spillovers to the private sector through higher funding costs,” the RBI said in its financial stability report earlier in the day.