Yield of the 10-year benchmark government security (G-Sec) has risen only by 32 basis points vis-a-vis the 90 basis points hike in the policy repo rate since the current rate hike cycle began on May 4.
For the US, in the current rate hike cycle, which started from March, the Federal funds rate has been raised by 150 basis points whereas yield of its 10-year paper rose by 77 bps during the same period, according to Bank of Baroda’s economic research report.
Supply side measures
Referring to recent moderation in domestic yields as compared to the repo rate hike, Dipanwita Mazumdar, Economist, BoB, observed that domestic yields got comfort from government’s supply side measures (excise duty cut on petrol, diesel and measures on edible oil prices front) to check inflation. The current June inflation reading also got slight comfort from those measures.
She noted that oil prices have fallen by 11.9 per cent in the current fortnight (ended July 15), and by 18.1 per cent from its high of $124/barrel seen on June 8, 2022. This has comforted domestic yields on account of expectation of lower burden in terms of inflation.
“Global sovereign 10Y yields have shown moderation across the board as recession fears outweighed inflationary concerns. However, central banks kept in mind price stability and went on with aggressive rate hikes.
“India’s 10Y yield has only fallen a tad in the current fortnight,”Mazumdar said.
Yield of the 10-year benchmark G-Sec (coupon rate: 6.54 per cent) closed at 7.4381 per cent on July 15 against 7.4241 per cent on July 1.
The Economist emphasised that durable liquidity is still at an elevated level. This is supporting yields apart from risk off sentiment due to aggravated growth concerns.
“We expect India’s 10Y yield to trade in the range of 7.40-7.50 per cent in the next fortnight with risks remaining on the upside.
“Major event will be the Fed policy meeting. As per CME Fed watch, 71 per cent traders are anticipating a 75 bps rate hike. However, 100 bps cannot also be ruled out. If this happens, domestic yields might inch upward in line with global yields,” she said, adding a repo rate hike of 50-75 bps is expected in the current cycle.
Also, any devolvement in the auctions will put pressure on yields as seen in the July 15 auction. Even depreciating currency also poses upside risk to domestic yield outlook in terms of FPI debt outflow.
Rupee breaches 80
Meanwhile, the rupee breached the 80 to the dollar mark for the first time during official trading hours, touching an intraday low of 80.06 even as the Dollar Index declines and the euro strengthened.
However, the Reserve Bank of India’s strong intervention ensured that the rupee closed about 3 paise stronger at 79.94 per Dollar against the previous close of 79.97.