The yield on the benchmark bond soared past the 8% mark in intra-day trades on Tuesday before closing at 8.063%, the highest level in nearly four years. Money market players attributed the rise in yields to apprehensions that a weaker currency would stoke inflation, prompting the Reserve Bank of India (RBI) to raise interest rates as early as October.
The yield had last crossed 8% in intra-day trades on May 8, 2015 when it touched 8.006%; on Tuesday it saw an intra-day high of 8.068%. Late last week, State Bank of India raised lending rates by 20 basis points while ICICI Bank raised loan rate by 15-25 basis points on Monday.
The rupee weakened considerably on Tuesday falling all the way to 71.565 against the greenback. The rupee has now fallen for six continuous trading sessions, losing 2% in the last five days alone and nearly 11% since the start of 2018. Traders are now apprehensive about the effect of rising crude oil prices on both the trade as well as fiscal deficits.
The price of Brent Crude increased to $9.42/barrel on Tuesday; the price increased by $1.5 per barrel from Monday’s close. The price of crude oil has gone up by 12.22% from mid-August till now.
Bonds have been selling off in the last few sessions as investors fear the higher imported inflation could trigger a rate hike by the monetary policy committee (MPC) at their October meeting.
Sandeep Bagla, associate director of Trust Capital, noted that investors in the market have advanced their expectations of a rate hike and are expecting another hike as early as October.
“Higher crude prices prompt weakness in currency markets and raise expectations of higher current account deficit (CAD) and inflation. Bond markets tend to discount further rate hikes by trading at higher yields,” Bagla added.
A few bankers expect the RBI or the finance ministry to announce a fresh set of strategies to cool yields but say that there is no intimation so far.
“The markets are feverish, with everything going against us, we expect some kind of assistance from the officials but it looks like they are comfortable with the present levels,” the banker added.
The depreciating rupee, higher crude oil prices and the recent circular on FPI investments have all contributed to higher yields. “The yields only have an upside from here. We now see the yield climb up to 8.15-8.25% levels,” the banker added.
Foreign Portfolio Investors (FPI) have been shown a mixed trend in their investment pattern, buying $202 million worth of stocks on Monday but remaining net sellers in the bond markets with sales of $103.4 million. The huge mark-to market losses sustained by banks, as a consequence of the sharp rise in yields over the past year has made them cautious, money market experts pointed out, since they are biggest holders of gilts.