MUMBAI: Government bond yields declined on Wednesday as market participants drew comfort from Reserve Bank of India Governor Sanjay Malhotra’s comments that it was premature to discuss interest rate hikes. The fall in crude oil prices also aided, dealers said.
The yield on the benchmark 10-year government bond fell by 6 basis points (bps) to settle at 6.80 per cent, its lowest level since March 20 this year.
“If it was so certain that we are going to hike in the coming months, then we would have changed the stance from neutral to restrictive, right? We did not do that,” said Sanjay Malhotra, governor, the Reserve Bank of India on Wednesday. “We did not do that precisely because there is elevated uncertainty,” he said.
The governor said uncertainty stemming from geopolitical developments remained elevated.
The RBI governor also noted that risks from crude oil prices had moderated following recent developments in West Asia. The Monetary Policy Committee was closely monitoring both oil prices and the progress of the monsoon, he said.
While the cumulative monsoon rainfall has remained below normal so far, Malhotra said India had adequate food grain buffers and there were no concerns from a food security perspective. The impact on growth and inflation would depend on the distribution and intensity of rainfall going forward, he said.
Market participants said receiving interest from offshore investors in the overnight interest swap (OIS) market further contributed to the rally. The five-year overnight indexed swap (OIS) rate settled at 6.18 per cent, against the previous close of 6.26 per cent.
“People are bullish after crude oil prices declined and the RBI Governor said it is premature to go for rate hike. Receiving interest from offshore investors has also supported bond prices. The five-year OIS rate has eased to around 6.15 per cent,” said a dealer at a primary dealership.
Brent crude oil prices fell to $75.52 per barrel from $77.09 per barrel on the previous day.
Dealers said some market participants were also positioning for the possibility of additional inflows related to bond index inclusion, which added to the positive sentiment.
However, traders said the rally could face resistance around the 6.78-6.79 per cent level on the yield on the benchmark 10-year bond. They said technical indicators suggest the market could see a pullback if yields approach those levels.
Private sector banks were among the major buyers in the government securities market during the session, dealers said.
“There is also some speculation around potential index-related inflows. However, the rally may face resistance around the 6.78-6.79 per cent level, where a pullback is possible,” said a dealer at another primary dealership.
The rupee, meanwhile, recovered from intraday lows despite a rise in the dollar index. Dealers said dollar sales by state-owned banks, likely on behalf of the Reserve Bank of India (RBI), helped cushion the domestic currency against further weakness.
The rupee settled at 94.66 per dollar, against the previous close of 94.74 per dollar.
The dollar index rose to 101.62, against the previous day’s 101.17 on expectations of further rate hikes by the US Federal Reserve.
Market participants said recent RBI measures aimed at attracting foreign currency inflows, including those related to Foreign Currency Non-Resident (Bank), or FCNR (B), deposits and external commercial borrowings, continued to support sentiment.
Source: Business Standard
