Bond, currency markets witness high volatility in FY20 over Covid-19 fear

The rupee ended the 2019-20 fiscal year at Rs 75.6 dollar, and the 10-year yields closed at 6.1 per cent. At the start of the year, rupee and bond yields were at 69.2 a dollar and 7.4 per cent, respectively.
Bond and currency markets witnessed a highly volatile year, as Covid-19 fear brought the markets to a near halt.

 
While the rupee hit its lifetime low of about 76.30 a dollar, the 10-year bond yields fell to 6 per cent, as Covid-19 led to an unprecedented slide in financial assets worldwide. As yields fall, prices of bonds rise and the vice versa.

 
The rupee ended the 2019-20 fiscal year at Rs 75.6 dollar, and the 10-year yields closed at 6.1 per cent. At the start of the year, rupee and bond yields were at 69.2 a dollar and 7.4 per cent, respectively.

 
The bonds, in particular, rallied investors' dumped stock to keep their money locked into fixed income. The government, at the end of the year, also allowed foreign investors to invest, without any limits in five specified bonds, maturing between 2024 and 2049.

 
This may lead to inclusion in global bond index in the coming 12-18 months, HSBC noted. An inclusion in the Bloomberg-Barclays Global Aggregate Index could attract potential flows of $6-7 billion, the bank said in its report. However, it is unlikely to solve the mood immediately for foreign investors who remained net sellers in the bond market.

 
“While India’s potential index inclusion is a positive development in the medium term, it is unlikely to provide any immediate relief in the current environment of foreign liquidation. Foreign investors have withdrawn around $9.5 billion from Indian bonds over the past six weeks,” the bank noted.

In sync with other central banks, the Reserve Bank of India (RBI) introduced a number of liquidity infusion measures to compensate for the foreign investors outflows and keep the bond yields soft. The liquidity infusion by the RBI in March itself amounts to Rs 6.5 trillion, or just about 3.2 per cent of the gross fiscal deficit (GDP). This includes Rs 1 trillion of targeted long-term repo operations (TLTRO) specifically to support the corporate bonds. The yields fell sharply on the corporate bonds.

The emerging markets currencies, including rupee, has recovered slightly against the dollar, and going forward, soft oil prices should help rupee. But it is all contingent upon how fast the Covid-19 threat abates.

 
Taking a firm call on currency is not possible at this juncture, say dealers. For the next week, the rupee should find support between 75.15 and 75.65, dealers say. But a potential dollar rally can upset the maths.

“The LIBOR (London Interbank Offered Rate) is still elevated despite humongous liquidity injection by the US Fed. The stress is not being reflected in the FX markets as of now but is certainly something to keep an eye on,” noted IFA Global. 

While the RBI has enough foreign exchange reserves to contain a currency volatility, it is also spending a lot of dollars through intervention. For example, in the week ended March 20, the RBI sold $12 billion to stabilise the currency. 

After June, however, Indian banks can participate in offshore markets through their foreign branches. That opens up a whole new avenue for the RBI to intervene in such markets. This, according to currency dealers, can cut the exchange rate volatility to a great extent, currency dealers say.



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