Inflation worries in the US, the possibility of aggressive rate hikes by the Fed, and a spike in US bond yields to four-year high levels sparked a global sell-off in equity and financial markets on Monday. While the Sensex and Nifty declined by 2.7 per cent, the rupee closed at yet another record low of 78.0350 per dollar, down 20 paise over the previous close, in the backdrop of the Dollar index gaining strength and selling by FPIs in the equity markets.

G-Sec yields jumped, with the 10-year benchmark yield closing at 7.60 per cent, up 8 basis points vis-a-vis the previous close, on fears that the US Fed will go for aggressive rate hikes due to high inflation.

Rising bond yields
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Rising bond yields indicate that financial markets are not anticipating inflation to cool down in the US even though it touched a four-decade high last week. On Monday, as the US stock index futures of Dow Jones, S&P and Nasdaq went into a tailspin, it led to a global market fall. The Nasdaq index in the US is said to have entered a bear market since it is down 20 percent from its peak. The Sensex was down 1,456 points to close at 52846 and the Nifty fell by 427 points to close at 15774. Monday’s fall in global markets came after a 3 per cent decline in the US markets last Friday after the inflation numbers were reported. 

“Uncertainty is the biggest enemy of markets and bond yields are front running them. There’s uncertainty over the success of inflation control measures by central banks, China’s Covid lockdown and the geopolitical scenario in the wake of Russian sanctions. Even if the war ends, sanctions on Russia will remain. Hence, charts show crude oil at $160 per barrel in the near future. If that happens, I see Nifty falling to 14200, “said Rohit Srivastava, chief strategist at India Charts.

10-year US Treasury yields touched 3.24 per cent, the highest since October 2018. The sell-off in European government bonds also gathered pace, and the yield on Germany’s two-year government debt rose to over 1 per cent for the first time in over a decade. Italian benchmark yields exploded to 4 per cent, threatening to blow into the sovereign debt crisis if immediate steps did not come from the central banks and government.

Rahul Arora, CEO, institutional equity at Nirmal Bang, holds a contra view to the current negative scenario. “There is too much pessimism. Corporate earnings drive the markets and they are robust. The RBI has indicated that inflation will cool down by the fourth quarter of 2022. India is just 18 months away from national elections, so a spike in government spending is expected, which will bring liquidity. Even if Nifty sees big gap down tomorrow and does not close near the days low levels, I will start buying. Stock prices have declined by 50-70 per cent and downside seems limited,” Arora said.

Currency market

In the currency market, INR hit an intraday low of 78.28. The RBI started selling dollars at this level. It intervened at various levels between 78.15 and 78.25 to rein in the depreciating trend in the rupee. Anindya Banerjee, VP, Currency Derivatives and Interest Rate Derivatives, Kotak Securities, noted that heavy RBI intervention is suspected, both in spot as well as forwards. 

“Thanks to that alleged intervention, today the rupee is one of the strongest currencies in the world. Going forward, till the US Fed meeting on Wednesday, there could be significant upward pressure on USDINR.

Bloodbath in the G-Sec market

The yield of the 10-year benchmark G-Sec shot up 8 bps to close at 7.6036 per cent (7.5195 per cent), with its price declining 54 paise to close at ₹92.84 (₹93.38).

Marzban Irani, CIO-Fixed Income, said there was a bloodbath in the G-Sec market as the latest (May) US retail inflation reading was at a 40-year high, trigerring fears that the Fed may hike interest rates by 75 bps. He added that this could further widen the spread between US 10-year paper and Indian 10-year paper.

Irani said there are concerns on a couple of fronts—a depreciating rupee and the recent increase in minimum support price for some crops could have an inflationary effect.

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