G-Sec yields tighten as inflation remains high, rupee depreciates

MUMBAI: The yield on the benchmark 10-year government security firmed 13 basis points to 6.88% after retreating to a 30-month low in September, reflecting the combined impact of higher consumer inflation in October, the central bank governor’s hawkish comments on policy outcomes. , and a weakening rupee.

A rally in the dollar index and the temporarily waning appeal of emerging market assets continue to pressure yields.

September hit a record low after the US Federal Reserve cut interest rates by 50 basis points, leading to softer US Treasury yields, softer domestic bond yields and a stronger rupee. The US T-bill yield was seen as low as 3.64% during September.

Two months later, in early November, US yields rose to 4.48%, driven by demand for the safe-haven dollar after pro-tariff Donald Trump won the US presidential election. A rise in US bond yields makes assets in emerging markets like India less attractive, leading to a rise in domestic bond yields.

“Trump’s re-election and flare-up in the Russia-Ukraine war are creating general risks across all emerging market assets. Also October inflation remains high, and a print is expected for next month (November),” said Rajiv Pawar, head of treasury at Ujjivan Small Finance. was the bank.

Consumer Price Index (CPI)-based inflation rose to a 14-month high of 6.21% in October from 5.49% in September, while food inflation stood at 10.87%. CPI was above the comfort level of 2% to 6% for RBI.

“With inflation out of RBI’s comfort zone, markets expect a rate cut in February or April, so bond yields will remain in a tight range until then. Elevated US yields will also put a floor on domestic yields,” Vikas Goyal said. of PNB Gilts.

With bond yields rising, the Indian rupee weakened to a record low of 84.49/$1 in November, as foreign portfolio investors sold heavily from Indian stocks and bonds. Foreign portfolio investors have sold $4 billion so far in November and $11 billion in October, depository data showed. “With the rupee depreciating, all Indian bonds have also depreciated, causing investors to pull out,” Pawar said.

“Most investors who invest in government securities have unhedged positions. So currency depreciation will be a concern,” said a financial market expert at a private sector bank.