Yield of Benchmark 10-Year G-Sec Reaches Three-Year Low as Rupee Falls to Record Low
The yield on the benchmark 10-year Government Security (G-Sec) has fallen to its lowest level in almost three years. This follows expectations that the Reserve Bank of India (RBI) will take action to enhance liquidity, which is anticipated to tighten later this month due to outflows related to Goods and Services Tax (GST) and advance tax payments. Simultaneously, the Indian Rupee has dipped to an all-time low, affected by a strong US Dollar and mounting demand from importers.
Expectations of Liquidity Measures by RBI
The G-Sec yield softened to close at 6.6845 percent, down from the previous closing rate of 6.71 percent. The price of the bond increased by approximately 20 paise, closing at ₹100.74, compared to ₹100.54 previously. Generally, bond yields and prices move in opposite directions.
Marzban Irani, Chief Investment Officer for Fixed Income at LIC Mutual Fund, highlighted that the difference between the benchmark bond and the overnight repo rate has narrowed to 18 basis points from around 30 basis points over the past ten days. He suggested that the RBI may consider a temporary cut in the cash reserve ratio or could increase the frequency of variable rate repo auctions. There might also be attempts to conduct buy-sell Dollar-Rupee swaps as part of its liquidity management strategy.
Rupee Hits All-Time Low
On the currency front, the Indian Rupee (INR) weakened significantly, closing at a record low of 84.74 per Dollar, compared to the previous close of 84.70. During the trading session, it reached a low of ₹84.76.
Amit Pabari, Managing Director at CR Forex Advisors, noted that the INR is currently under short-term pressure due to a combination of domestic and global factors. He pointed out that while the Dollar Index has pulled back to around 106.50 from its previous peak of 108, robust US economic data indicates a stable economy. This resilience suggests that the magnitude of anticipated Federal Reserve rate cuts in 2025 may diminish, creating downward pressure on the Rupee as well as other emerging market currencies.
Factors Influencing the Rupee's Decline
Additionally, other Asian currencies, including the Chinese Yuan, have seen depreciation, partly due to fears over potential tariffs from the US administration as Donald Trump takes office in January. Pabari explained that this broader regional trend exacerbates the difficulties faced by the Rupee.
Furthermore, on the domestic front, the RBI's ability to sell dollars is hampered by a liquidity deficit in the banking system, which limits its effectiveness in supporting the Rupee.
Foreign Institutional Investor Outflows
Despite a reduction in the pace of foreign institutional investor (FII) outflows compared to October and November, the Indian equity market remains overvalued, prompting continued FII withdrawals in December. V Rama Chandra Reddy, Head of Treasury at Karur Vysya Bank, remarked that the INR's depreciation has accelerated to reach new record lows following Trump’s negative remarks about the BRICS nations' initiatives to create a currency that competes with the dominance of the US dollar.
Reddy noted that Trump's tariff threats and pre-inauguration actions signal an intention to cement his administration's agenda, which could result in higher US yields and a stronger dollar, further worsening the situation for the Rupee.
yield, rupee, liquidity