MUMBAI: Government bond yields rose on Monday as a sharp surge in global crude oil prices stoked fears of higher inflation and delayed monetary easing, offsetting the Reserve Bank of India’s (RBI) move to inject. ₹1 trillion of liquidity through open market operations.
The yield on the 10-year benchmark government bond rose as much as 10 basis points to 6.78%, but closed at 6.72%, according to data from Clearing Corporation of India. It had closed at 6.68% on Friday.
Brent crude futures for May delivery jumped over 20% in trading on Monday to near $120 a barrel, the highest since June 2022, as the US-Israel conflict with Iran continued, prompting some major West Asian producers to cut supplies and raising fears of prolonged disruption to shipments through the Strait of Hormuz. Crude prices are currently trading at about $110 a barrel.
The surge in crude oil prices and a fall in the rupee to a record low of 92.3350 per dollar, amid escalating conflict in West Asia, drove traders to dump bonds.
The rupee opened at 92.2063 per dollar on Monday, but soon slid and closed at 92.33 amid persistent dollar demand, according to Bloomberg data. The Indian rupee had closed at a record low of 92.15 against the US dollar on 4 March.
Broadly, the rupee is seen on a depreciating trend but is not weakening as sharply as traders had expected, as the RBI continues to intervene in the market to support the currency.
“Considering crude prices will continue to hover over $100 per barrel, and the war doesn’t escalate, the rupee is looking to trade in the range of 91.50 to 93.25 per dollar in the near term,” Ritesh Bhansali, deputy chief executive officer at Mecklai Financial Services said.
Iran on Monday named Mojtaba Khamenei to succeed his father, Ali Khamenei, as supreme leader, signaling the leadership remains firmly in control, a week after the US and Israel launched the war.
“Normally, the RBI’s announcement of OMO (open market operations) purchases should have helped yields to improve along with money market instruments but globally sentiments are not supported. So, I do not think government bond yields would soften significantly anytime soon,” a senior treasury official said.
Yields stay elevated
In a major move, the RBI announced OMO purchases worth ₹1 trillion in two batches starting this week to ensure adequate liquidity in the banking system and prevent tight conditions in money markets. The step comes as demand-supply dynamics, tight liquidity and rupee depreciation have kept government bond yields elevated for much of the current fiscal, despite a 125 basis-point cut in policy rates.
“The rupee’s renewed depreciation is making the RBI’s job more difficult. By announcing ₹1 trillion of OMOs even when core liquidity surplus was already around ₹5 trillion as of 27 February, the central bank is ensuring ample liquidity and creating space for foreign-exchange intervention to defend the currency,” Gaura Sengupta, chief economist at IDFC FIRST Bank said.
“The RBI is also acting pre-emptively ahead of seasonal outflows such as advance tax payments and GST payments in March,” Sengupta said.
without the ₹1 trillion liquidity infusion, the banking system could have temporarily slipped into deficit as about ₹2 trillion is expected to go out due to advance tax payments on 15 March and another ₹1 trillion for goods and services tax (GST) payments around 20 March, she said.
As on 8 March, banking system liquidity was in a surplus of ₹2.41 trillion, according to RBI data.
Market participants expect the move to keep liquidity comfortable but say it is unlikely to directly rein in yields if global factors continue to dominate.
“Volatility has shortened investment horizons across markets and bond yields are going to harden in the near term,” Killol Pandya, head of fixed income at JM Financial Asset Management said.
Pandya expects the benchmark 10-year yield to move higher from current levels. “We are already at around 6.75%. The worst estimate which I can think of is somewhere north of 6.80%, maybe towards 6.85%, but I don’t really see the 10-year going above 6.85% at all for now,” he said.
Market participants expect the surge in oil prices to have a stronger impact on inflation. Over the weekend, the government increased the price of domestic LPG by ₹60.
“Further, the increase in weightage of the crude basket in the new CPI series is higher than that in the old series, making the impact of crude on CPI numbers higher,” Killol said.
Seasonal factors may also tighten liquidity conditions in the coming weeks.
“With March seasonality kicking in, advance tax outflows and month-end pressures will tighten cash conditions. Across the bond market, short term as well as long term, yields are likely to stay on the higher side rather than seeing a sudden drop,” he said.
