Yield of Benchmark 10-Year G-Sec Drops to Three-Year Low as Rupee Hits Record Low

The yield on the benchmark 10-year Government Security (G-Sec) has fallen to its lowest point in almost three years. This decline is primarily driven by expectations that the Reserve Bank of India (RBI) will announce measures to enhance liquidity, especially as anticipated outflows from Goods and Services Tax (GST) and advance tax payments may tighten liquidity later this month. Meanwhile, the Indian Rupee has weakened significantly, closing at an all-time low against the U.S. Dollar, influenced by strong dollar demand and importer activity.

The benchmark G-Sec yield closed at 6.6845 percent, down from a previous close of 6.71 percent. Concurrently, the price of these bonds rose by about 20 paise to settle at ₹100.74 from ₹100.54. It is essential to note that bond prices and yields have an inverse relationship; as bond prices increase, yields decrease.

Possibility of RBI Measures

Marzban Irani, Chief Investment Officer of Fixed Income at LIC Mutual Fund, mentioned that the gap between the benchmark G-Sec and the overnight repo rate has decreased to 18 basis points over the past ten days, down from about 30 basis points. He speculated that in response to the looming liquidity constraints, the RBI might implement a temporary reduction in the cash reserve ratio (CRR) or increase the frequency of variable rate repo auctions. There’s also a possibility that the RBI could conduct buy-sell dollar-rupee swaps to manage the liquidity situation effectively.

Rupee Hits New Low

On the foreign exchange front, the Indian Rupee weakened to close at ₹84.74 per Dollar, a decline from the previous day’s close of ₹84.70. During the day, it fell to an intraday low of ₹84.76. This depreciation is attributed to a mix of domestic and international factors, putting pressure on the Rupee.

Amit Pabari, Managing Director of CR Forex Advisors, indicated the short-term pressure on the Rupee, noting that the Dollar Index has pulled back to around 106.50 from its peak level of 108. However, positive U.S. economic indicators suggest stability in the economy, leading to expectations that the Federal Reserve may reduce the extent of anticipated rate cuts in 2025. Consequently, this situation could place additional downward pressure on the Rupee and other emerging market currencies.

FPI Outflows and Regional Trends

Moreover, while the rate of outflows from Foreign Institutional Investors (FIIs) has slowed compared to the preceding months, the overvalued levels of the Indian equity markets have continued to spur outflows in December. V Rama Chandra Reddy, Head of Treasury at Karur Vysya Bank, remarked that the depreciation of the Indian currency has accelerated due to adverse comments from former U.S. President Donald Trump regarding BRICS initiatives to establish an alternative currency that challenges the dollar’s dominance.

Trump's threats of tariffs and pre-inauguration actions suggest that he plans to pursue these policies, potentially leading to higher U.S. yields and further strengthening the dollar. This overall context may exacerbate the difficulties faced by the Indian Rupee in the foreign exchange market.

Yield, Rupee, Liquidity