Benchmark bonds sold off on Wednesday as conviction about a potential fiscal stimulus by the government to boost the slowing economy got stronger amongst the trading community, along with worries about a weakening currency slowing down foreign portfolio investor (FPI) flows also taking its toll.
The 10-year benchmark yield hit over a one-month high level to close 10 basis points higher at 6.63% on Wednesday.
A bond market expert said on top of the fiscal stimulus expectations and a rise in core inflation, Tuesday’s core inflation data also came in higher than what the market was expecting. “A weakening currency always puts question about on FPI flows and that might have also spooked the market,” he added. Foreign portfolio investors (FPIs) remained net buyers of Indian debt so far in August.
Harihar Krishnamoorthy, treasurer, Firstrand Bank, said the market feels there could be a higher fiscal deficit given the possibility of the government intervening to address the slowdown situation. “Furthermore, uncertainties over the sovereign bond issuance is causing the bond yields to rise,” he said.
Market experts also indicate that although they expect short-term volatility to sustain, the hardening of yields could be a temporary phenomenon.
In the August monetary policy, the Reserve Bank of India had stated that with inflation projected to remain within the target, addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture. Dealers had explained that with the rate cut being 35 basis points and the focus being on growth, at least one more rate cut may be in the offing.
Rupee rebounds from 6-month lows, spurts 13 paise
Rebounding from six-month lows, the rupee advanced 13 paise to close at 71.27 against the US dollar on Wednesday amid easing oil prices and gains in the domestic equity market.
Forex traders said the US delaying new tariffs on Chinese electronics goods as well as encouraging macroeconomic data also boosted investor sentiment.
At the interbank foreign exchange market, the Indian unit opened strong at 71.00 and rose to the day’s high of 70.85. It touched an intra-day low of 71.35, before finally ending at 71.27, higher by 13 paise from its previous close.
On Tuesday, the rupee had plunged 62 paise to close at a nearly six-month low of 71.40 against the US dollar as global market turmoil and Argentine currency crash drove investors to safe havens.
“The Indian rupee has now become Asia’s worst performing currency so far this month, Chinese yuan depreciated amid trade worries and foreign investor outflows,” said VK Sharma, head-PCG & capital market strategy, HDFC Securities.
Positive macroeconomic data also supported the domestic unit.
While retail inflation eased marginally to 3.15% in July, wholesale inflation fell to a two-and-half-year low of 1.08%, government data showed.
Foreign institutional investors (FIIs) remained net sellers in the capital markets, pulling out Rs 638.28 crore on Tuesday, according to provisional exchange data.
Brent crude futures, the global oil benchmark, tumbled 1.62% to $60.31 per barrel. The dollar index, which gauges the greenback’s strength against a basket of six currencies, was at 97.82, up 0.01%.
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Source: Financial Express