Bonds slump to 21-month lows on fears of more RBI steps

Last Updated: Fri, Aug 16, 2013 12:29 hrs

By Subhadip Sircar

MUMBAI (Reuters) - Indian benchmark government bonds slumped to 21-month lows on Friday and posted their worst week in four-and-a-half years, as the rupee slid to a record low despite policy makers' efforts to defend the currency.

The Reserve Bank of India late on Wednesday unveiled rules to restrict how much its citizens and companies can invest abroad and announced additional curbs on gold imports.

The steps raised concerns of outright capital controls that would further undermine the confidence of foreign investors, which were reinforced after upbeat U.S. jobless claims data on Thursday suggested an early end to the Federal Reserve's asset purchases and send U.S. Treasury yields to two-year highs.

Bonds are increasingly becoming hostage to the rupee's falls, which is becoming symptomatic of the country's macroeconomic weaknesses, including rising vulnerability on the external front.

"It is the fear of more RBI measures, not an outright repo rate hike per se. That the liberalisation of the capital account is no longer sacrosanct has also shaken investor faith," said R. Sivakumar, head of fixed income at Axis Mutual Fund.

The benchmark 10-year bond yield ended 38 basis points higher at 8.88 percent, its biggest single day rise since July 16, the day after RBI first took its cash tightening steps.

It rose to 8.90 percent during the session, its highest level since November 2011.

Yields rose for the ninth week in 10, rising 76 basis points.

The fall in bond prices came as the rupee slid to a record low of 62.03 to a dollar on Friday as local stocks got pummelled on fears that the government may widen its capital control measures which has been limited to local residents for now.

Bonds fell more after the central bank set higher-than-expected yield cutoffs at the weekly government bond auction and devolved part of the auction, another indication that traders said showed that RBI may be indicating higher interest rates.

Total volumes continue to remain thin at 99.25 billion rupees.

The long-end rate swaps rose, tracking a rise in US Treasury yields, while the short-end surged on fears of imminent RBI action.

The benchmark five-year overnight indexed swap rate closed 28 basis points higher at 8.94 percent. The one-year rate ended 36 bps up at 9.96 percent.

(Editing by Anand Basu)

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