The 10-year bond yields touched 8 per cent for the first time since December 2014, while the rupee hit a record low at 71.18 against the dollar even as the local equities fell sharply on Monday.
The bond market has started showing some fatigue on prospects of the rising supply of paper. The second half borrowing, the calendar for which would come by the month end, is expected to be heavy from the Centre and states combined, and higher growth numbers also mean the central bank may find it encouraging to raise rates.
The rate hike could come as early as in the October policy, market participants said. A rate hike can also strengthen the rupee, something that the Reserve Bank of India (RBI) may want to consider now. An unpredictable and rising oil price also would put pressure on fiscal maths, compelling the government to borrow more from the markets.
The bond market is currently positioning itself for the coming supplies, by pushing up yields, say bond traders. “The bunched-up supply, amidst currency woes and rising crude oil prices, has definitely affected the bond market sentiment,” said Ramkamal Samanta, vice-president for investments at Star Union Dai-Ichi Life Insurance.
The gross market borrowing of states is expected to cross Rs 6 trillion, same as that of the Centre. Both the Centre and states plan to mop up about half of their borrowings in the first half. That means, at least Rs 6 trillion of high-quality papers are going to hit the market. An inflation-targeting central bank, hiking rates to control prices and to fight off a rupee-induced imported inflation, makes the matter complicated for the bond market, which recently incurred heavy mark-to-market losses because of adverse yield movement. About a year back, the 10-year bond yield was at around 6.5 per cent level. The central bank has hiked rates by about 50 basis points in the year.
Rupee, meanwhile, continued with its slide against the dollar, even as most other currencies in the region are in a recovery mode.
The rupee closed at 71.18 a dollar, another fresh record low, as the RBI continued with its hands-off approach. According to currency dealers, the RBI intervened in the market lightly in the morning, bringing it to 70.73 a dollar level, but the central bank was not there in the market when the equities witnessed some sell-off at the closing. So far this year, the rupee has fallen 10.3 per cent, and is the worst performing currency in the region. However, currency dealers don’t see the rupee sliding sharply from the present levels and expect the RBI to intervene heavily at around 72-72.5 a dollar level.
“There is probably no point intervening much now. The RBI did try to keep the rupee at the 69-level for a long time, but once they stopped intervening, the currency slid 2 per cent. The RBI may not want to spend its reserves for nothing,” said Abhishek Goenka, managing director of IFA Global.