In a sign that money is becoming more expensive, the yield on the benchmark bond on Monday touched the psychological 8% mark before closing at 7.999%, an increase of nearly five basis points (bps) over Friday’s close of 7.952%.
Meanwhile, the rupee on Monday slipped to yet another record low of 71.2137 against the dollar in intra-currency trades and staged only a limited recovery to end the session at a fresh closing low of 71.2050.
On Monday, ICICI Bank raised its marginal cost of funds-based lending rates (MCLRs) by 15-25 basis points (bps) across tenures, following a similar move by larger rival State Bank of India (SBI) late last week. The one-month MCLR at ICICI Bank now stands at 8.55%, which is 10 bps higher than the corresponding rate at SBI.
The rise in rates is partly explained by some shortage in liquidity since the Reserve Bank of India (RBI) has curbed lending activity at nearly a dozen state-owned banks. In the three months to June, the value of issuances in the corporate bond market was a negative `16,920 crore; in the March quarter, the issuances were Rs 1.03 lakh crore. Several banks have raised deposit rates over the past few months since the pace of deposit growth has been modest.
Market watchers say yields could stay at elevated levels. Vijay Sharma, EVP, PNB Gilts, said the markets were expecting another rate by the RBI as early as October, given the strong GDP growth number for Q1FY19.
“The bond yields will continue to rise as long as the rupee continues to depreciate since both move in tandem with each other,” Sharma added.
Dhawal Dalal, CIO, Edelweiss AMC, observed that given bond yields should trade at a spread of around 5% to the US treasury, the local yield should trade at around 8-8.25% levels in the near term.
The rupee has depreciated sharply over the last two months for several reasons — a stronger dollar and weaker emerging market currencies. While foreign portfolio investors (FPIs) had turned buyers in July and bought through much of August — both in the equities and bond markets — they turned sellers of stocks towards end of August.
The new rules on beneficial ownership of an FPI entity put out by the capital markets regulator Sebi in early April have spooked investors. Fund managers said if the regulations were not relaxed, around $75 billion dollar worth of investments might need to be unwound in a short period, causing a sharp fall in the rupee. The FIIs have already pared positions, in response to the Sebi circular,” MV Srinivasan, vice-president, Mecklai Financial Services, said.
Apart from the strengthening of the dollar, the rupee has also been impacted by the contagion effect of the steep depreciation of the other emerging market (EM) currencies. Interestingly, the dollar index — dollex — hovered around 95.22 levels, up from 95.14 on Friday.