 "Rupee dips 4.36% in Samvat 2081 as trade tensions weigh, bonds gain")
The rupee remained under pressure during Samvat 2081, depreciating by 4.36 per cent against the dollar in the period. The depreciation was mainly driven by a rise in global trade tension.
The onset and escalation of US reciprocal tariffs on Indian goods, raising effective duties up to 50 per cent in some sectors, weakened investor sentiment towards Indian markets.
These tariff hikes, aimed at countries, including China and others in Asia, disrupted global trade flows.
They created a risk-off environment that weakened emerging market currencies, including the rupee.
Additionally, concerns about a widening current account deficit and reduced foreign investment inflows added to the pressure.
The domestic unit hit multiple record lows during the year due to foreign outflows.
“The rupee was under constant pressure during the year. At first, the US election, then tariff. The foreign outflows led to the sharp decline in rupee,” said the treasury head at a private bank.
“There was intervention by the Reserve Bank of India (RBI) in all the three markets which contained the rupee from breaching 89 per dollar mark,” he added.
To counter excessive volatility, the RBI stepped in multiple times, selling dollars in the foreign exchange market and using its forex reserves to prevent the rupee from sliding further.
Despite these interventions, the rupee was one of the worst performing currencies.
On the other hand, the government bond market saw a more positive trend during the year on the back of a cumulative 100 basis points (bps) rate cut by the RBI.
Yield on the benchmark 10-year government bond fell by 33 basis points during the period.
At the start of the year, bond yields were buoyed due to inflation worries and growth concerns.
However, as inflation gradually moderated, expectations for a more accommodative policy stance began to build in the debt market.
The central bank deployed different liquidity infusion tools in order to ensure successful transmission of rate cuts.
Government bond yields across maturities were under downward pressure initially, buoyed by policy rate cuts, liquidity injections by the RBI, and strong demand from domestic investors.
During the first quarter, the central bank conducted open market operations (OMO) purchases worth ₹2.4 trillion which helped banks book treasury gains.
“The bond yields were mainly on a downward trajectory because of rate cuts, liquidity infusion and lower inflation,” said a senior executive from a primary dealership.
“There was some supply pressure in the second quarter which was also addressed,” the person added.
The benchmark 10-year government bond yield fell by about 20 bps during the first quarter, moving from around 6.58 per cent to 6.38 per cent.
The sharpest drop in yields occurred ahead of RBI policy actions in June.
At one point, the yield had even touched 6.24 per cent, indicating substantial mark-to-market gains for bond portfolios.