Yield of Benchmark 10-Year G-Sec Falls to Three-Year Low as Rupee Hits Record Low

The yield of the benchmark 10-year Government Security (G-Sec) has dropped to its lowest level in almost three years amid expectations that the Reserve Bank of India (RBI) will introduce measures to enhance liquidity. This comes as liquidity conditions are anticipated to tighten later this month due to GST and advance tax outflows.

The current yield of the 10-year G-Sec stands at 6.6845 percent, down from the previous close of 6.71 percent, while its price has increased slightly to ₹100.74. There is an inverse relationship between bond yield and price; as the yield declines, prices typically rise.

According to Marzban Irani, Chief Investment Officer for Fixed Income at LIC Mutual Fund, the spread between the benchmark G-Sec and the overnight repo rate has narrowed recently, indicating changes in liquidity conditions in the banking system. Irani pointed out that, as a liquidity management strategy, the RBI might announce a temporary reduction in the cash reserve ratio, increase the frequency of variable rate repo auctions, or conduct buy-sell Dollar-Rupee swaps.

Rupee Weakens to Record Low

In parallel, the Indian Rupee (INR) has weakened, closing at a record low of 84.74 per Dollar. During the day, it dipped further to an all-time low of ₹84.76. Amit Pabari, Managing Director of CR Forex Advisors, noted that the Rupee is currently facing short-term pressure due to a mix of domestic and international elements.

Despite the Dollar Index retreating to around 106.50 from its peak of 108, resilient economic data from the U.S. suggests a stable economy. This stability implies that the anticipated Federal Reserve rate cuts in 2025 may not be as significant as previously thought, which could negatively impact the Rupee and other emerging currencies.

Moreover, other Asian currencies, including the Chinese Yuan, have seen depreciation, partly due to concerns surrounding potential tariffs from the U.S. with Donald Trump set to take office in January. Pabari emphasized that this broader trend in the region adds to the challenges faced by the Rupee.

On the domestic front, the RBI is under pressure concerning dollar sales because of a liquidity deficit in the banking system, which limits its ability to support the Rupee. Additionally, while foreign institutional investor (FII) outflows have decreased compared to previous months, the still-high valuations of the Indian equity market continue to spur FII exits.

V. Rama Chandra Reddy, Head of Treasury at Karur Vysya Bank, remarked that the Rupee's depreciation has accelerated to extreme levels, particularly after Trump's comments about BRICS' attempts to develop a currency that might challenge the U.S. dollar's position as a major reserve currency. Trump's tough stance and agenda indicate potential for increased U.S. yields and a stronger dollar, which could exacerbate the depreciation trend for the Rupee.

yield, Rupee, RBI