A falling rupee, rising global treasury yields and weak macro-economic fundamentals sent 10-year benchmark bond yields vaulting over the nine-per-cent mark on Monday.
The rupee hit an intraday low of 63.30 against the dollar before closing at a new low of 63.13.
The Sensex closed at 18,397, down 290 points or 1.5 per cent, and the Nifty closed at 5,415, down 93 points or 1.6 per cent.
Price of the benchmark Government security (G-Sec), which carries an interest rate of 7.16 per cent on maturity, fell by about Rs 2 to Rs 86.87 on Monday, with yields shooting up about 33 basis points to 9.23 per cent as foreign investors pulled out money from the debt and equity markets. (G-Sec prices and yields move in opposite directions.)
Also, redemption from mutual funds piled pressure on bond prices.
Collateral damage
Clearly, the RBI’s liquidity-tightening measures to prop up the rupee are resulting in collateral damage in the bond market.
With the Government on Monday borrowing one-month money at 12.23 per cent (against 11.94 per cent last week), bankers say this is a clear indicator of the direction interest rates are headed in the economy. Provisioning towards depreciation in bond prices and bad loans can seriously impact bank balance-sheets, say bankers. There is also the fear that the RBI will take some more liquidity tightening measures to prop up the rupee.
“Sooner or later this is going to impact bank lending rates. As the manufacturing sector is contracting and the demand for credit is subdued, banks are not in a position to raise lending rates aggressively. But some upward adjustment in spreads or effective cost of borrowing cannot be ruled out,” says Rupa Rege Nitsure, Chief Economist, Bank of Baroda.
Bank depositors may, however, have something to cheer about as interest rates on deposits may rise in tandem.
The inflation effect
The current hardening of bond yields, says BoB’s Nitsure, is because of the nervousness resulting from the currency depreciation. “Bond yields have been rising on the back of weakening rupee, relatively sticky retail inflation coupled with rising treasury yields globally.”
This, coupled with high interest on the US treasury bills, is keeping investors away from the Indian market. The US 10-year bond yield rose to 2.85 per cent, which is a 103 basis points increase over the past one year.
Moses Harding, Head – ALCC and Economic & Market Research, IndusInd Bank, says, “Investors have zero-appetite to invest in 10-year G-Secs.” Till the RBI brings the operative policy rates below the current bond yields there is unlikely to be any major change in bond prices, he says.
On Monday, the benchmark bond was the highest traded security with 802 registered trades and total volume of Rs 6,890 crore. The rest of the government bonds registered either double- or single-digit trades. The rising bond yields and higher effective interest rate have pushed up borrowing costs for banks. Last month, the RBI increased the rates at which banks borrow under its marginal standing facility by 3 percentage points to 10.25 per cent and also restricted the amount banks can borrow from it under the repo window.
However, one section of market participants eels this trend is unsustainable and bond interest rates will fall.
“In India, if structural issues are sorted out then we should see some stabilisation of the rupee. If the rupee stabilises then the bond yields will also stabilise and so will the equity markets,” says N. S. Venkatesh, Chief General Manager and Head of Treasury, IDBI Bank.
(With inputs from K. Ram Kumar)