Indian rupee tumbled to a new low, while bonds and stocks retreated amid growing worries that accelerating inflation may force the central bank to tighten rates more aggressively.

The rupee dropped as much as 0.5% to 77.6313 per dollar on Thursday, hitting a record low for the second time this week. The benchmark Sensex Index tumbled 1.7% to the lowest in two months. Sovereign bonds also retreated.

Investors are worried that inflation staying above the upper tolerance band of 6% for the fourth-straight month may nudge the central bank to continue hiking rates to avoid breaching its mandate. The RBI will raise its inflation forecast in the June monetary policy meeting, possibly setting the stage for more interest rate increases by August, a person familiar with the matter said.

“Sentiment is low, the stock market is low, and every day you see red,” said Anoop Verma, a fixed income trader at DCB Bank Ltd. “The biggest barometer for the economy is the currency’s strength, and if that keeps weakening every day, it’s not a good sign for any market.”

The yield on benchmark 10-year bonds rose five basis points to 7.27% after declining about 25 basis points in the previous two sessions to Wednesday. The yields had increased to the highest since April 2019 on Monday after the central bank raised interest rates in an out-of-cycle move last week.

Source:
courtesy of BLOOMBERG

by Ronojoy Mazumdar

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