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Government Securities (G-Secs) yields jumped about 8-9 basis points to two-year highs and rupee depreciated against the dollar on Thursday, spooked by the statement of US Fed’s Federal Open Market Committee (FOMC) it expects that it will soon be appropriate to raise the target range for the federal funds rate.
Market players say with inflation well above 2 per cent and a strong labour market in the US, the hike in federal funds rate could happen as early as March.
This will have implications for global economies, including India, as the hike could trigger capital outflows and weaken currencies.
Yield of the erstwhile 10-year benchmark G-Sec/ GS, maturing in 2031, shot up about 9 basis points (bps) to close at 6.7465 per cent (previous close: 6.6574 per cent), with its price declining 60 paise to close at ₹95.53 (₹96.13).
Bond yields and prices are inversely co-related and move in opposite directions. One basis point is equal one-hundredth of a percentage point.
Yield of the new 10-year benchmark G-Sec/ GS, maturing in 2032, soared about 8 basis points (bps) to close at 6.7459 per cent (6.6618 per cent), with its price declining 60 paise to close at ₹98.52 (₹99.12).
Madan Sabnavis, Chief Economist, Bank of Baroda, said: “The RBI has to take a call at some time on the rewinding of liquidity and the Fed’s long term guidance could be taken as a template by the MPC (Monetary Policy Committee) for consideration.
“We have high inflation and uncertain growth just like the USA. The market is demanding higher yields and the question is how long can the RBI hold on to the present stance?”
Rupee weakens
The rupee (INR) weakened by about 30 paise to close at 75.09 to the dollar (USD) as the greenback strengthened on FOMC’s statement.
IFA Global, in a report, observed that the USD-INR pair rose because the US dollar surged against major currencies after the US Fed indicated an interest rate hike in March at its two-day policy meeting outcome.
The USD-INR pair also rose because some banks persistently purchased the US dollar for oil marketing companies, noting elevated Brent crude oil prices,the report said.
Prices of Brent crude oil surged and were near the $90-a-barrel mark, driven by tight supplies and rising geopolitical tensions between Russia and Ukraine.
“The sentiment for the domestic currency was dampened due to a sharp fall in domestic and Asian benchmark equity indices that weakened after the Fed concluded its policy meeting with an indication on raising interest rates,” IFA Global said.
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