Rupee, bond prices head north after crude oil skids to 6-month low

Indian rupee and bond prices hit a two-week high on Wednesday after crude oil skid to six-month low, fueling expectations of easing inflation.

At 9.30am, the currency was trading at 79.32 a dollar, up 0.42 percent from its previous close. The 10-year bond yield dropped 9 basis points to 7.205 percent from its previous close of 7.31 percent. Both bond yield and prices move in opposite directions.

Oil prices fell about 3 percent on Tuesday to their lowest since Russia launched its invasion on Ukraine as economic data spurred concerns about a potential global recession, while the market awaited clarity on talks to revive a deal that could allow more Iranian oil exports. Brent crude futures fell $2.76, or 2.9 percent, to settle at $92.34 a barrel. The contract hit a session low of $91.71 per barrel, the lowest since February 18, Reuters reported.

Analysts said the falling crude oil will help reduce fiscal deficit and bring down inflation in India. The recent buying started from foreign investors in Indian equities as well as bonds also improved sentiments. Since mid-July, FII have bought $4.50 billion worth of Indian equities.

India's consumer inflation dipped to 6.71 percent in July, helped by a slower increase in food and fuel prices. The US consumer price inflation  scaled 8.5 percent in the year through July, below Bloomberg estimates of 8.7 percent. Investors are now expecting inflation to have peaked and the Fed will slow down the pace of rate hikes in the coming months.

"Given the MPC’s focus on anchoring inflation expectations and the  RBI governor’s statement on inflation moving closer to the target of 4 percent over the medium term, we expect another rate hike of 10-35 bps in the September 2022 policy meeting. Thereafter, we believe the MPC is likely to be extremely data dependent. If the downtrend in commodity prices sustains, we expect the first sub-6 percent print to emerge by the middle of Q3 FY2023, which may prompt a pause to reassess the robustness of growth" said Adity Nayar, chief economist at ICRA.