Yield of the benchmark 10-year Government Security (G-Sec) fell to its lowest in almost three years on expectations that the RBI will announce temporary liquidity enhancement measures. The Rupee declined to an all-time closing low, weighed down by a strong Dollar and importer demand.

There are expectations that the RBI will announce measures to improve liquidity as it is likely to turn tight later this month due to GST and advance tax outflows.

Yield of the benchmark 10-year G-Sec softened to close at 6.6845 per cent (previous close: 6.71 per cent), with its price rising about 20 paise to close at ₹100.74 (100.54). Bond yield and price are inversely co-related and move in opposite directions.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, the spread between the benchmark paper and the overnight repo rate has narrowed to 18 basis points from about 30 bps in the last 10 days or so.

He observed that as part of liquidity management measures, the RBI may announce either a temporary cut in cash reserve ratio or increase the frequency of variable rate repo auctions or do buy-sell Dollar- Rupee swaps.

Rupee weakens

The Indian Rupee (INR) weakened to close at a record low of 84.74 per Dollar against the previous close of 84.70. Intraday, it dipped to an all time low of ₹84.76.

Amit Pabari, MD, CR Forex Advisors, said the INR appears to be under short-term pressure, driven by a combination of domestic and global factors.

Fed rate cuts

He observed that while the Dollar Index has recently retreated to around 106.50 from its peak of 108, resilient U.S. economic data suggests a stable economy. This resilience indicates that the anticipated Federal Reserve rate cuts quantum will be reduced in 2025, exerting downward pressure on the Rupee and other emerging market currencies.

Further, other Asian currencies like the Chinese Yuan have depreciated, partly due to concerns over potential tariffs from the U.S. once Donald Trump assumes office in January. This broader regional trend adds to the Rupee’s challenges, Pabari said.

He noted that on the domestic front, the RBI faces constraints in selling dollars due to a liquidity deficit in the banking system, reducing its ability to support the Rupee effectively.

FPI outflow

Moreover, although the pace of foreign institutional investor (FII) outflows have eased compared to October and November, the Indian equity market’s still-overvalued levels continue to prompt FII outflows in December.

V Rama Chandra Reddy, Head-Treasury, Karur Vysya Bank, opined that the INR’s depreciation has accelerated to new record levels following Trump’s adverse comments on BRICS’ efforts to create a currency that challenges the US dollar’s dominance as a reserve currency.

Trump’s tariff threat and his pre-inauguration actions suggest that he intends to follow through on his agenda, which could lead to higher US yields and a stronger dollar. This scenario may further exacerbate the rupee’s decline, he said.

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