Yield of Benchmark 10-Year G-Sec Hits Three-Year Low as Rupee Dips to Record Low

The yield of the benchmark 10-year Government Security (G-Sec) has dropped to its lowest level in nearly three years. This decline comes with expectations that the Reserve Bank of India (RBI) is likely to introduce temporary liquidity enhancement measures. Concurrently, the Indian Rupee has fallen to an all-time low against the Dollar, pressured by a strong Dollar and high importer demand.

RBI's Liquidity Measures Expected

Market analysts believe that the RBI may soon announce steps to enhance liquidity in response to tightening conditions anticipated later this month. These measures are prompted by upcoming Goods and Services Tax (GST) payments and advance tax liabilities that typically lead to cash outflows.

Recently, the yield on the benchmark 10-year G-Sec settled at 6.6845 percent, down from the previous 6.71 percent, suggesting a rise in bond prices which closed at ₹100.74. The relationship between bond yields and prices is inverse, meaning as price increases, the yield decreases.

According to Marzban Irani, Chief Investment Officer for Fixed Income at LIC Mutual Fund, the difference in yield between the benchmark G-Sec and the overnight repo rate has narrowed from approximately 30 basis points to 18 basis points over the past ten days.

Potential RBI Actions

Experts speculate that to manage liquidity, the RBI might consider various measures, such as lowering the cash reserve ratio or increasing the frequency of variable rate repo auctions. Another option could be to conduct Dollar-Rupee swap transactions to stabilize the currency.

Rupee Falls to Record Low

In line with these trends, the Indian Rupee closed at a record low of ₹84.74 per Dollar, a slight drop from its previous closing of ₹84.70, even hitting an intraday low of ₹84.76. Amit Pabari, Managing Director of CR Forex Advisors, indicates that the Rupee is facing short-term pressure due to both domestic and international influences.

Despite the recent drop in the Dollar Index to around 106.50 from a high of 108, robust U.S. economic indicators suggest that the anticipated cuts to Federal Reserve rates may not be as significant as previously thought. This scenario increases downward pressure on the Rupee as well as other emerging market currencies.

Regional Currency Trends

Furthermore, other Asian currencies, such as the Chinese Yuan, have also depreciated amid fears of potential U.S. tariffs when Donald Trump takes office in January. This regional trend exacerbates the challenges faced by the Indian Rupee.

Pabari also notes that domestically, the RBI is limited in its ability to intervene in the market to stabilize the Rupee because of a liquidity deficit in the banking system.

Foreign Institutional Investor Outflows

Additionally, while the slowdown in foreign institutional investor (FII) outflow appears to have eased compared to previous months, the ongoing overvaluation of the Indian equity market may still encourage FII outflows in December.

V Rama Chandra Reddy, Head of Treasury at Karur Vysya Bank, remarks that the Rupee's decline has been accelerated by negative comments from Trump regarding the BRICS nations' push to establish an alternative reserve currency, which could challenge the dominance of the U.S. Dollar.

Considering Trump's looming threats and impending policies, it is anticipated that these factors will contribute to rising U.S. yields and a strengthened Dollar, further complicating the Rupee’s situation.

Yield, Rupee, Liquidity