USD/INR risks fresh record highs on rising Treasury yields

• INR could slide to fresh record lows, courtesy of a pick up in the treasury yields.
• The limited policy response indicates India is preferring a weaker currency.

The USD/INR is currently trading 72.70, having clocked a record high of 72.98 on Tuesday.

The pullback could be short-lived and the currency pair could rise to new highs above 73.00 as the US 10-year treasury yield rose to a four-month high of 3.06 percent yesterday.

More importantly, limited policy response and mild intervention by the Reserve Bank of India (RBI) indicates the world's fastest-growing major economy is warming up to the idea of a weaker currency.

Indeed, the government announced measures on Friday to tackle the current account deficit, but those are unlikely to put brakes on the rupee fall and are well short of stronger measures like Non-Resident Indian (NRI) bonds, FX swap window for oil-marketing companies introduced during the previous bouts of rupee weakness.