The Rupee (INR) depreciated beyond 76 per Dollar (USD) on account of the greenback gaining strength against major global currencies, foreign investors selling in the domestic equity markets and State-run banks buying dollars on behalf of oil marketing companies for oil import related payments.

INR closed at a two-week low of 76.13 per USD, against the previous the previous close of 75.95.

Separately, Government Securities (G-Secs) yields rose on Tuesday, tracking spike in US Treasury yields, even as the debt market was gripped by concerns that rising inflation may prompt the monetary policy committee (MPC) to change its stance and hike rates in the June policy review.

Yield of the 10-year benchmark G-Sec/GS (coupon rate: 6.54 per cent) was up about 4 basis points (bps) and closed at 7.1895 per cent (previous close: 7.1486 per cent). Price of this security fell about 28 paise to close at ₹95.485 (₹95.76).

GS yields and prices are inversely co-related and move in opposite directions. One basis point is equal to 0.01 per cent.

The 10-year US Treasury yield had shot up to 2.79 per cent on Monday, reaching its highest level in three years due to worries on rising inflation and possibility of the US Fed aggressively tightening monetary policy.

The Indian G-Sec market is also being weighed down by expected increase in supply of G-Secs due to the Government’s large borrowing programme in FY23 and concerns that rising inflation may force the hand of MPC members to up the repo rate.

Meanwhile, with the March 2022 retail inflation reading coming in at a 17-month high of 6.95 per cent (above MPC’s upper tolerance limit of 6 per cent) against 6.07 per cent in February, the MPC may have no choice but to act in the June policy review to stanch rising inflationary pressures.

Aditi Nayar, Chief Economist, ICRA, observed that with the MPC having signalled an imminent stance change, the rate hike cycle may begin as early as June 2022, if the next CPI inflation print doesn’t significantly cool off from the March 2022 level.

“We now expect to see 50-75 bps of rate hikes by the end of Q2 (July-September) FY2023, followed by a pause in H2 (October 2022-March 2023) FY2023, and perhaps another 50 bps of hikes in FY2024.

“With the CPI inflation surging in March 2022, we expect the 10-year G-Sec yield to cross 7.2 per cent imminently. With dimming hopes of early bond index inclusion, the 10-year G-Sec yield could test 7.5 per cent in H1 (April-September) FY2023,” Nayar said.

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