Yield of Benchmark 10-Year G-Sec Falls to Three-Year Low as Rupee Reaches Record Low

The yield on the benchmark 10-year Government Security (G-Sec) has dropped to its lowest level in nearly three years, spurred by expectations that the Reserve Bank of India (RBI) will introduce temporary measures to enhance liquidity in the market. Meanwhile, the Indian Rupee has also seen a decline, closing at a record low as it encounters pressure from a strong Dollar and increasing demand from importers.

RBI's Potential Measures

Market analysts anticipate that the RBI will take action soon to boost liquidity, especially as the financial system is likely to face tighter conditions later this month due to the outflows related to Goods and Services Tax (GST) and advance tax payments. Such outflows typically create a cash crunch, prompting the central bank to intervene.

Current Bond Trends

As of the latest trading session, the 10-year G-Sec yield settled at 6.6845%, down from the previous close of 6.71%. The price of the bond increased by about 20 paise, resulting in a closing price of ₹100.74. It is important to note the inverse relationship between bond yield and price, meaning as the yield decreases, the price tends to increase.

Marzban Irani, Chief Investment Officer for Fixed Income at LIC Mutual Fund, noted that the difference between the benchmark paper and the overnight repo rate has narrowed recently, signaling potential shifts in market conditions.

Expectations of Liquidity Management

Irani further speculated that as part of its liquidity management strategy, the RBI could consider measures such as a temporary reduction in the cash reserve ratio, increasing the frequency of variable rate repo auctions, or conducting Dollar-Rupee currency swaps.

Rupee Weakness

On the currency front, the Indian Rupee depreciated to an all-time low of 84.74 per Dollar, down from the previous close of 84.70. At certain points during the day, it fell even further to ₹84.76.

Amit Pabari, Managing Director at CR Forex Advisors, explained that the short-term pressure on the Rupee is a result of various domestic and global factors. Despite a recent retreat in the Dollar Index from its peak, strong U.S. economic data suggests a stable economy, which in turn might lessen the reductions anticipated in Federal Reserve interest rates in 2025.

Global Economic Influencers

Further complicating matters for the Rupee, other Asian currencies, such as the Chinese Yuan, are also experiencing downward pressure, partly due to fears that new tariffs might be implemented by the U.S. once Donald Trump resumes leadership in January. This regional trend is putting additional strain on the Indian currency.

Challenges for RBI's Intervention

Pabari highlighted that on a domestic level, the RBI is facing difficulties in actively selling dollars to support the Rupee, as there is a liquidity deficit within the banking system. This situation limits the central bank's capacity to stabilize the currency effectively.

Foreign Institutional Investor Outflows

Additionally, while the outflows of foreign institutional investors (FIIs) have slowed compared to earlier months, the continued overvaluation of the Indian equity market remains a cause for concern, resulting in persistent FII pullbacks in December.

V Rama Chandra Reddy, Head of Treasury at Karur Vysya Bank, pointed out that the Rupee’s depreciation has been exacerbated following Trump’s critical remarks regarding BRICS nations' attempts to create a competing currency against the U.S. dollar. Such geopolitical developments could have implications for market dynamics.

yield, rupee, RBI