Despite encouraging trade data for October, the Indian rupee fell through the 63-mark on Monday to end near a two-month low while worries about an earlier-than expected tapering of the US Federal Reserve’s stimulus measures coupled with fears of an overhang of gilts in the local market pushed bond yields past the 9% mark.
The yield on the 10-year benchmark 7.16%, 2023 bond touched an intra-day high of 9.14%, before easing to 8.95% at close; these levels have not been seen since mid-August when the Reserve Bank of India (RBI) had abruptly tightened liquidity to stem the rupee’s fall. On August 17, the 10-year bond yield had closed at 9.24%.
A weaker currency and higher interest rates in the bond market pushed broader equity markets and bank stocks lower. Extending losses for the fifth consecutive session, benchmark Indian indices declined nearly 1% on Monday, led by sharp losses in shares of banks and rate-sensitive companies. In a volatile session, the Sensex shed 175.19 points to end at 20,490.96 — a three-week low — while the Nifty gave up 1.01% to settle at 6078.80.
While a part of the jump in yields was in line with global yields moving higher — the yield on the US treasury hit 2.75% — much of it was due to apprehension the RBI would not infuse further liquidity via open market operations (OMO). “About 7-8 basis points of today’s move in the yield can be attributed to the better-than-expected US data but a large part is due to the lack of OMOs,” Jayesh Mehta, MD & country treasurer, Bank of America, said. Yields could rise to 9.20% before stabilising, added IDBI Bank head of treasury NS Venkatesh.
Meanwhile, better jobs data from the US sent the dollar soaring against most global currencies; the dollar index was ruling at 81.157 against 81.14 in mid-September. Expectations that the US Fed’s taper of its $85 billion monthly bond purchases could begin early next year pushed up treasury yields to 2.75.
Despite trade deficit for October halving to $10.5 billion year-on-year, currency markets refused to be cheered.