The government’s bond yields rose 8 basis points to close at 7.48 per cent on Thursday with domestic traders, hoping for decisive signs of a slowdown in the Federal Reserve’s tightening cycle, being left disappointed.
Total trade volumes in the regular secondary bond market were at Rs 21,150 crore on Thursday.
The rupee also weakened on Thursday but did not suffer the magnitude of the damage that bonds did. The rupee settled at 82.89 per US dollar on Thursday against 82.79 on Wednesday. In 2022, the rupee has depreciated 10.3 per cent against the US currency.
On Wednesday, the US Fed announced a 75-bps rate hike, taking the total amount of tightening in 2022 to 375 bps. This marks the most aggressive US monetary tightening cycle in almost two decades. Higher US interest rates lead to global capital flowing to the world’s largest economy, thereby diminishing the appeal of assets in emerging markets such as India.
While the Fed’s official statement hinted at the possibility of future rate hikes being of a smaller quantum, Fed Chair Jerome Powell subsequently said that terminal rates in the US could be higher than expected.
Investors in the domestic bond market who had bet on a softer view from the Fed Chair – Indian bond yields had largely ignored a rise in US bond yields on Wednesday – consequently scrambled to unwind those positions, driving up local yields.
“The general expectation from the US Fed was that they will start pivoting. The statement did have such a hint.
In the press conference, Powell spooked the markets by saying that inflation is a far bigger risk and they will focus on controlling it for as long as necessary,” said Vijay Sharma, senior executive vice-president, PNB Gilts.
“Not only did US yields sell off overnight, but during the day as well. There was a 10-12 bps overnight rise in US yields, and another 8 bps during the Asian and European trading hours. So our bond markets also had no escape,” he said. Sharma sees yield on the 10-year bond in a range of 7.45-7.55 per cent over the near term.
Dealers said that with the rupee having already witnessed a significant degree of volatility over the past few months, the local currency had been spared much damage after the latest Fed hike. The Reserve Bank of India was said to have sold dollars around the 82.90/$1 mark, but not very aggressively.
“Over the medium term, we continue to hold on to the view that the dollar bid will gradually fade as the Fed starts to slow its pace of rate hikes, and markets again price in a Fed pivot,” HDFC Bank’s Treasury Research desk wrote.
“This should reduce the dollar’s appeal or at least put a cap on its peak. In turn, we expect this to bring about some stability in the USD/INR pair in Q1 2023,” they wrote.