G-Sec yields rise further amid rising oil price and increasing possibility of US rate hike

Rising Brent crude oil prices and the US Fed Chief’s comment that he is inclined to support a rate hike at the next meeting impacted the Government Securities (G-Sec) market on Thursday, with the yield of the 10-year benchmark G-Sec closing at the highest level since the monetary policy committee (MPC) decided to keep the policy rates unchanged.

Yield of the 10-year benchmark G-Sec/GS (coupon rate: 6.54 per cent) nudged up about a basis point close at 6.826 per cent (previous close: 6.8145 per cent). Yield of this Security has risen by about 10 basis points since the MPC’s decision to hold rates on February 10.

Price of the 10-year benchmark G-Sec declined 8 paise to close at ₹97.96 (previous close: Rs 98.04). Since February 10th, price of this security has declined by 71 paise.

RBI action

“Earlier, it was only due to the Reserve Bank of India’s (RBI) intervention that yields had come down. G-Sec supply was not there due to cancellation of auctions. Now, if LIC IPO doesn’t happen, the Government will have to borrow,” said Dwijendra Srivastava, CIO - Debt, Sundaram Mutual Fund.

The major worry for India is on the crude oil front as rising price and depreciating currency will have an inflationary impact, he added.

Brent crude oil price had surged to close to $120 a barrel on Thursday. India will feel the inflationary effect of this price surge as it imports almost 80 per cent of its crude oil requirements.

Federal Reserve Chair Jerome Powell, in testimony to the U.S. House of Representatives Financial Services Committee on Wednesday, signaled the central bank would likely raise interest rates.

Rupee down

Meanwhile, the rupee ended 21 paise lower as banks continued to purchase dollars on behalf of oil marketing companies amid rising crude oil prices and foreign portfolio investors selling in the Indian equity markets.

The Indian unit (INR) ended at 75.91 to the US Dollar (USD) against previous close of 75.70.

Anindya Banerjee, DVP, Kotak Securities Ltd, said “USDINR spot closed 21 paise higher at 75.91, highest levels since December 20th. Thanks to surging oil prices and falling stock market, Rupee depreciated against the US Dollar.

“We suspect RBI has been intervening aggressively and that may have prevented a bigger drop in Rupee. Over the near term, we expect USDINR to trade with an upward bias within a range of 75.60 and 76.40 on spot.”