The Indian rupee dropped to its lowest level in three weeks and bond yields fell on Friday as concerns over a new COVID variant spooked markets across the globe.
Shares and currencies in Asia's emerging markets fell sharply as investors fled riskier assets after the detection of the significant new mutation, which in-turn strengthened safe-haven assets like the dollar.
The partially convertible rupee was trading 74.71/72 per dollar at 0736 GMT compared to its close of 74.51. It touched a low of 74.5850 earlier, its lowest since Nov. 2.
The benchmark 10-year bond yield was trading at 6.32%, down 5 basis points from its close on Thursday.
"Buying being seen in bonds is largely on account of the new variant today. The market now expects the RBI to be dovish due to the uncertainty," said Murthy Nagarajan, head of fixed income at Tata Asset Management.
"Some people are also toying with the idea that they may not even hike the reverse repo rate".
The Reserve Bank of India is due to announce its monetary policy committee's decision after a three-day meeting on Dec. 8 and a large section of the market has been expecting them to start raising the reserve repo rate in an effort to normalise the policy rate corridor to pre-pandemic levels.
The central bank has already started conducting variable rate reverse repo auctions of slightly longer tenors to temporarily absorb the massive liquidity surplus in the banking system but has shied away from announcing any more permanent measures so far.
Traders expect the 10-year bond yield to trade in a 6.25% to 6.40% range until the policy decision, while the rupee is expected largely track domestic shares and dollar moves for direction. It is broadly expected to hold between 74.25 to 75 per dollar range over the next two weeks.
Moves in global crude oil prices will also be closely monitored as they has a large impact on India's import bill, with the country shipping in more than three-fourths of its oil requirements.
Oil prices slid more than 2% on Friday on concerns that a global supply surplus could swell in the first quarter following a U.S.-led coordinated release of crude reserves among major consumers and as the new COVID variant spooked investors.
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