G-Sec yields rise as the US Fed remains resolute in pushing back inflation

US Fed officials’ comments that they expect to keep raising rates to curb the stubbornly high inflation and high trade deficit proved party-poopers for Government Securities and the rupee on Wednesday.

Government Securities (G-Secs) snapped a nine-day rally, tracking rising US Treasury yields, with the yield of the 10-year benchmark G-Sec (coupon rate: 6.54 per cent) rising about 5 basis points and its price declining 30 paise.

With India’s trade deficit widening to a record $31 billion in July from $26.2 billion in June, the rupee felt the heat, snapping a four-day rally. It closed down 45 paise at 79.165 to the dollar against the previous close of 78.7175.

G-Sec prices decline

The government securities market has rallied over the last nine trading sessions on expectations that the Reserve Bank of India (RBI) may turn less hawkish as retail inflation appears to have peaked.

The yield of the 10-year benchmark G-Sec plummeted about 24 basis points between July 21 and August 2. Consequently, the price of this paper shot up by about ₹1.61 Bond prices and yields are inversely co-related and move in opposite directions .

However, comments by US Fed officials from three different States indicated they remain resolute in pushing inflation, which is at the highest level since the 1980s, was interpreted by the financial markets to mean that the Fed may persist with a large rate for some more time .

This news had a negative impact on the Indian debt market, resulting in the yield of the 10-year paper going up about 4 basis points and was last traded at 7.2416 per cent (previous close: 7.1962 per cent). The price of this paper was down about 30 paise, with the last traded price being ₹95.2525 (₹95.55).

Rupee snaps 4-day gain

The record trade deficit, the possibility of the US Fed persisting with large rate hikes, a strong dollar and purchases of greenbacks by oil marketing companies pushed the rupee above the 79 level.

Live fire exercises by China around Taiwan also cast a shadow on the Indian unit.

The rupee started depreciating after opening at 78.6750, which was also the intraday high. It hit an intraday low of 79.1825 before closing at 79.165. Dealers said the RBI did not intervene in the market.

Anindya Banerjee, Vice President, Kotak Securities Ltd., said: “USDINR closed 45 paise higher at 79.16 on spot. Hawkish comments from Fed members and strength in the US Dollar Index pushed the pair higher. We suspect the RBI may have intervened to replenish its reserves.

“At the same time, much of the long liquidation is behind us and hence the market gravitated towards a balanced state. In the near term, we could see USDINR trade within a broad range of 78.75 and 79.50 on spot, with an upward bias. Key risks are US-China tensions over Taiwan.”

Published on

August 03, 2022

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