Indian government bonds extended their losing streak to nine consecutive weeks this week, with the benchmark 6.94% 2036 bond yield rising around 8 basis points to 7.3789%. According to reports from The Economic Times, this represents an over 62 basis points climb during the nine-week period, reflecting sustained investor concerns about the Reserve Bank of India's monetary policy stance. The sustained losses highlight the impact of the central bank's tightening measures on debt market sentiment, with fresh debt supply through the weekly auction on Friday adding to prevailing caution among investors.
The Reserve Bank of India has aggressively sold dollars to prop up the rupee, which has been facing headwinds from higher crude oil prices, rising US yields and persistent outflow of foreign capital. As per The Economic Times, the RBI's foreign exchange reserves fell by $8.578 billion in the reporting week ending October 9, bringing total reserves down to $726.027 billion from the lifetime high of $785.706 billion on September 4. This $60 billion decline over six weeks represents a significant escalation in the central bank's intervention efforts to support the rupee, which has been among Asia's worst-performing currencies. The depletion was largely due to dollar sales by the RBI through large public sector banks to support the currency.
India's foreign exchange reserves have fallen by $60 billion over the past six weeks, marking a dramatic escalation from the previous $51 billion decline since early September. According to latest data from The Economic Times, foreign currency assets, the largest contributor to reserves, fell by $7.142 billion in the reporting week to $597.605 billion. This represents a 35% erosion of the $143.596 billion the central bank had garnered between June and August through dedicated dollar mobilisation schemes and swap windows. Gold reserves also declined by $1.319 billion in the week to October 8 to $105.094 billion, further depleting the country's external buffers. Despite the crisis, India still holds one of Asia's deepest cushions, enough for 11 months of imports by the finance minister's reckoning.
The forex reserve decline coincides with foreign portfolio investors withdrawing a net $26.8 billion from local markets so far this year, as reported by The Economic Times. Traders are fearing the RBI may tolerate higher bond yields to preserve the spread over US rates, with the premium on India's 10-year yield over its US counterpart widening to 227 basis points this week from 206 bps a week earlier. The central bank is expected to tighten financial conditions further to stem capital outflows and raise the cost of shorting the rupee. Market participants are also concerned about duration-heavy central and state borrowing calendars adding further pressure to bond yields, with fresh debt supply through the weekly auction on Friday expected to face selling pressure. The latest forex reserve decline adds to market concerns about India's external position, with American inflation data on October 14 and Fed's October 28 meeting expected to shape monetary policy decisions globally.
