The year 2019 ended on a good note for banks and other bond investors as the 10-year bond yields softened 86 basis points (bps) since the start, thanks to rate cuts by the Reserve Bank of India (RBI), while the rupee also exhibited some stability despite a choppy global outlook rocking on trade tensions.
The 10-year bond yields closed the year at 6.555 per cent, from its January 1 level of 7.418 per cent. Bond prices rise, yields fall. Rupee closed at 71.38 a dollar, from 69.44 a dollar.
This was also the period when yield curve inverted in the US, which sent shock waves on concerns over an impending recession globally. The Indian bonds, too, responded to that movement but was capped by very aggressive rate cuts by the RBI. Since February, the central bank reduced rates by 135 bps, before halting in the December policy. The 10-year bond yields fell about 90 basis points in response.
The short-term yields, however, fell 137 basis points, transmitting the entire rate cut. This created a wide spread difference in the yield curve, which the central bank tried to rectify through special open market operations.
Despite the special OMOs done by the RBI, the tenor premiums have not narrowed down substantially, aiding to the problem of transmission of rates in bank lending.
“Higher term spreads in turn have been, along with higher credit spreads, associated with our transmission problem. Sovereign yields themselves being close to current nominal growth rates of the economy have in turn spoken to the debt," said Suyash Choudhary, head of fixed income at IDFC AMC.
Meanwhile, the RBI continued to intervene in the rupee market, both in the spot and forwards segment, boosting its reserves. Rupee was overvalued, which means strong against its competitors. But RBI bought the dollar inflow and corrected its overvaluation, noted Abhishek Goenka, managing director and CEO of IFA Global.
Rupee's immediate range could be 71.18-71.45 with sideways price action, Goenka said. He advised exporters to cover short term exposure, while importers should hold.