High Inflation & Fiscal Concerns Will Lead To Higher Bond Yields: Union Bank | CNBC TV18

追加: 2026-05-25

[00:00:02]Welcome back. You're watching Freeding Hour and the rupee's record-breaking slide showing no signs of easing is our big story for today. The currency has now hit a fresh all-time low of 96.96 against the greenback in the trading session extending its losing streak to an eighth straight day. The rupee is now down more than 7.7% so far this year making it one of Asia's worst-performing currencies for the year. The pressure on rupee has been building for more than a year now, but even more rapidly since the escalation of the West Asia conflict because of the rise in oil prices. And now the currency has weakened by nearly 6 and 1/2% since late February. What's to blame is the spike in oil prices, the stronger dollar, the rising yields, persistent foreign outflows, the risk aversion uh generally with the geopolitical conflicts, and an increasing worry about our widening current account deficit. All of that uh Mangalam Manormas is uh you know, playing out and pressuring the currency.

[00:00:56]Indeed, uh Ritu, you spoke about some of these factors. Let's uh go over each of them one by one.

[00:01:03]Well, Mangalam, no doubt uh you know, the big one of course is the oil prices.

[00:01:07]Brent crude has surged above $110 a barrel. It's up more than 50% since the uh you know, West Asia conflict began.

[00:01:14]And for India, which imports the bulk of its crude requirements, that translates into a sharply higher import bill and a much stronger demand for dollars. The oil shock is also of course raising worries of imported inflation, which economists in the channel have also been talking about, and a wider current account deficit. Both are negative for the rupee, but you know, it's not just oil. While that is a big factor, global investors have also been moving towards safe-haven assets. You know, so a stronger dollar, higher US bond yields, the rising gold prices, all of that reflects this risk-off environment.

[00:01:45]Treasury yields, especially in the US, they've surged. The 10-year yield in the US is now at a year higher and a 12-month high. And the 30-year yield is at its highest level since before the global financial crisis. So, markets are even beginning to price the possibility of another Fed rate hike, which is putting further pressure on emerging market currencies including the rupee and of course as we've been talking here on CNBC-TV18 foreign flows, they've been negative. That's adding pressure with you know, foreign investors have pulled out nearly 19,000 crore rupees from the Indian markets just in May so far taking the total outflows for 2026 at over 2.07 lakh crore rupees. That is more than 22 billion dollars. And of course higher US yields are making dollar assets far more attractive for these global investors.

[00:02:30]Well, they indeed are and uh Ritu now finally tell us how does this uh weaker rupee pressure the macros and what steps are the government and the RBI taking for this?

[00:02:40]Well, there are of course several macro implications here for India. The import cost rises. That's the first one. The pressure builds on fuel prices and sectors, you know, like your aviation, chemicals, paints, all these import dependent industries, they face higher input costs as a result. There's also concern that a persistently weak currency can also push up inflation and widen our current account deficit. Of course, the RBI and government have taken several measures so far to ease some of this volatility, uh you know, prevent more dollar outflows. For instance, fuel prices have been hiked twice now. Uh the import duties on precious metals has been increased. RBI has been intervening in the spot and forward currency markets. They've also capped the net open position for banks at $100 million a day to curb any speculative positions. And for the markets now, the next psychological level to watch out for is 97 rupees per dollar, Mark. And we're not too far off from there. Uh investors will also of course track the direction of you know, the oil prices, US-Iran developments, moves in US bond yields, Fed uh you know, rate expectations, and whether RBI's intervention intensifies and how all of this impacts the outcome of the June MPC meeting. So far, uh the consensus has been for that of a pause.

[00:03:50]But I wonder, I mean uh you know, if if there is also you know, some parts of the market that are talking about a potential hike. Actually on that note, let's invite Kanika Pasricha, the chief economic advisor at Union Bank of India who's joining us now. Kanika, let me put that question to you with all that's happening on the currency and so far RBI has been very hands-off and saying, you know, it's a shock absorber. You know, they don't target any particular level.

[00:04:13]They only ease volatility. I wonder if the pressure to you know, hike rates sooner than perhaps the end of the year the chances of that are going up now.

[00:04:23]So Ritu, thanks for having me on the show and you beautifully laid down the framework of the currency at the current juncture. See, frankly speaking, the driver of rate hikes at the current juncture in this year while rupee may be one of the reason, I would still want to focus more on inflation risk driving risk of rate hike sooner rather than later. See, frankly speaking, we all in our base case scenario and even MPC have 4.6% inflation for the year has penciled in average oil price of $85 per barrel. In case numbers move closer to $95, which we think can happen even after the war ends tomorrow because of the kind of supply disruptions we are bracing for, the inflation forecast for the year moves from 4.6 to 5% even as per RBI's monetary policy report. So in that scenario, the possibility for rate hike, which we are penciling in in Q3 of the year, later part of 2026, can shift towards the August meeting as well. So close watch on that. I would still say since we are in an uncertain world and we are all waiting and watching for what really is the end game of the war in the very near term when the Strait of Hormuz opens. June meeting is not live, so the guidance will be on watch, but maybe August can be the next live meeting if oil prices stay above the $100 per barrel mark. That's one. Second, do we think rupees are shock absorber?

[00:05:53]Yes, partly, but I would still not at these levels when rupees are beacon of macro stability, overall market stability as well. Though yes, in an uncharted world where the US 10-year is at 19-year highs, we can see overextended moves in the currency. But using the currency as a shock absorber is not our You we think as part of the policy package, it's consistent intervention to limit overextended moves in the currency is also needed to protect market sentiment.

[00:06:26]Thanks.

[00:06:29]But you know, Kanika, this persistent intervention you're talking about the RBI's burnt almost 40 billion dollars just since Feb. You know, to to stem this sort of you know, the steep fall that we've been seeing, but the you know, decline seems inevitable from the kind of you know, levels we saw at the start of the year down more than 7.7% or so.

[00:06:49]You know, are the measures not proving effective because of the current macro situation we're in? And and and to your mind, apart from what's already been done, what is the next best measure that the government or RBI could take or the more likely one to your mind?

[00:07:03]Thank you, Ritu.

[00:07:04]You're absolutely right. RBI has burnt reserves, but reserves are for rainy days, right? Now, even today at 690-695 billion dollars, if I don't adjust for the short even if I adjust for the short dollar forward position of more than 100 billion dollar, the reserve cover is still close to 9 months of imports. At the time of taper tantrum, it had actually slipped to 6 and 1/2 months. Of course, we would not want to get to that situation. We would want that RBI is able to cushion the currency even though protecting the reserves as well. And a delicate balance is sought at the current juncture. Now, in terms of policy measures, some of the measures that that have already been taken by the government to protect dollar demand, like you know, at least advocating work from home with some companies, some states have already started to undertake undertake fuel price hikes. These measures and even gold import duty hikes, gold import volume curbs. Now, these measures had just a starting point. I would say more aggression in terms of follow-up to reduce dollar demand via, you know, slightly, you know, extended fuel price hikes in order to curb oil consumption demand may be needed. Today, we have done on close to 4 rupees per liter, maybe this needs to go towards 10 rupees per liter even though the approach is gradual. I would still say non-essential imports also being are also being discussed, like electronics, some more curbs on non-essential imports may also be looked at. But, on the dollar supply or to curb dollar outflows, like LRS-related outflows, some sort of tightening measures can be looked at there. ODI outflows maybe case-by-case basis maybe looked at. Dollar supply measures, like a repeat of FCNR from 2013 may not be advocated in the immediate near term. It may not be a dividend because of the way yields are, global conditions are tight.

[00:09:06]But, once the Strait of Hormuz opens, maybe when conditions ease, global financial conditions ease, a concessional swap scheme to attract flows via FCNR or bonds is sought in the later part of the year, maybe in the next 3 to 6 months on an immediate basis because a structural part of BOP problem is capital account. Thanks.

[00:09:31]Kanika, run out of time, but just 30 seconds on what's happening globally with the bond yields as worried about uh, you know inflation spike from the higher crude oil prices and so the longer yield of the yields the 10 years and 30 years are spiking up. You know quickly do do you think we're entering the structurally high you know yield regime and how long you know can India hold the floor then?

[00:09:54]So you're right globally as well after an extended decade I would say extended period of low rates high dollar liquidity we are moving into a period of high inflation and fiscal concerns also coming back that's that's likely to lead to higher bond yields.

[00:10:12]Now in the US itself the market is pricing in a December rate hike even if it happens next year but if oil sustains at $100 per barrel even after the war ends tomorrow oil sustains in our view at 90 to 95 dollars per barrel. There is a case of rate hikes globally and of course the spillover impact will be seen on India as well.

[00:10:33]While the Fed may be in a wait and watch mode given the kind of regime change seen other G4 central banks are likely to hike it sooner rather than later and the spillover impact in India currently our projection is Q3 which is December quarter.

[00:10:50]We have got to see where oil prices settle to see if there's a case for August meeting being live or not.

[00:10:55]Thanks.

[00:10:57]Got that. All right Kanika thanks very much for you know being here and sharing those thoughts.

[00:11:03]We'll take a short break on that. Up next we'll get you more on the markets in just a bit.