Samvat 2079: Bond yields soften, rupee stable despite falling to fresh lows

The yield on the benchmark 10-year government bond fell by 21 basis points (bps), whereas the rupee depreciated by 0.79 per cent in the Samvat ending November 12. The new Samvat will begin from Monday.  

Government bond yields remained largely stable with a significant demand from insurance companies and state-owned banks throughout the year, said market participants. 

The yield on the benchmark 10-year government bond traded in a broad range of 6.96-7.51 per cent during the period.

The yields slumped in May on the expectation of rate cuts by the Reserve Bank of India’s (RBI’s) Monetary Policy Committee.

The domestic rate-setting panel paused the rate hike cycle after six consecutive hikes aggregating to 250 bps between May 2022 and February 2023. It prompted traders to stock up on government bonds and they bet that the committee's next action would be a rate cut.

Moreover, the headline consumer inflation moderated to 5.66 per cent in March, falling within the target band of the RBI, and lowest since December 2021.

After briefly reaching the target range in March, India's consumer inflation has been declining, and reached a 25-month low of 4.25 per cent in May.

However, the yields started rising again as central banks across the globe hiked rates. This was because the inflationary pressure persisted, and data did not change to the extent it was expected.

Domestic bond yields were relatively less volatile compared to the US treasury bond yields, as the market was driven by investors rather than traders.

“The main reason for lesser volatility has been that it has been an investor-driven market rather than a trader-driven one,” Vijay Sharma, senior executive vice-president at PNB Gilts said. “In terms of investors, nationalised banks and insurance companies were big buyers,” he added.

Foreign portfolio investors (FPIs) emerged net purchasers of Indian debt in 2023 for the first time in four years. The most recent instance of FPIs being net buyers was in 2019, when they invested Rs 25,882 crore in bonds.

The inclusion of domestic government bonds in JP Morgan’s emerging market (EM) bond index kept the domestic bond market afloat amid global challenges.

Meanwhile, the rupee bore the brunt of rising US yields and strengthened dollar. It touched a lifetime low of Rs 83.48 per dollar on the last day of Samvat.

The RBI remained active in the foreign exchange market throughout the year to curb volatility in the exchange rate.

Market participants said that timely intervention by the central bank protected the local currency from weakening further to 84 per dollar.

“This Samvat, the dollar-rupee volatility was the lowest since 2002,” said Anindya Banerjee, vice-president — currency derivatives & interest rate derivatives at Kotak Securities. “The rupee would have touched Rs 84 per dollar if the RBI did not intervene,” added Banerjee.

The Indian currency was stable in the first half of 2023 after a turbulent 2022, following the war in Europe and interest rate hike by the US Fed. It appreciated by 0.16 per cent in the first six months of the current calendar year on the back of robust foreign inflows.

Weakening of the yuan was the primary reason for the fall of the rupee in August. It was prompted by reduction of the interest rate differential between the yuan and the dollar.

Geo-political tension in West Asia and rising crude oil prices led to foreign outflows, which further weighed on the local currency from October.

The dollar index, which measures the strength of the greenback against a basket of six major currencies, rose up to 107 due to geopolitical tension.

During this financial year, the rupee depreciated by 1.4 per cent, whereas, in the current calendar year it fell 0.7 per cent so far.