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Government bond prices surged on Wednesday, with yield on the 10-year benchmark paper dropping 10 basis points (bps) as a slump in crude oil prices amid global growth concerns strengthened hopes of the Reserve Bank of India (RBI) adopting a less aggressive path for rate hikes.
Yield on the 10-year benchmark 6.54 per cent 2032 paper settled at 7.29 per cent, against 7.39 per cent on Tuesday.
Bond prices and yields move inversely. A fall of 1 bps in the yield on the 10-year paper corresponds to a rise in price of roughly 7 paise.
Brent crude oil futures fell 3.02 per cent on Wednesday, trading around $99.67 per barrel, while West Texas Intermediate Futures shed 3.25 per cent to trade at $96.27 per barrel.
The slide in international fuel prices comes amid strengthening fears of a global economic recession — and consequently lower demand for the commodity — amid steep interest-rate hikes by the US Federal Reserve.
For India, the implications of falling oil prices are favourable from the perspective of inflation and current account deficit, given the country’s huge dependence on oil imports.
With oil prices having cooled off significantly from the highs of nearly $140 per barrel after the Ukraine war broke out, treasury officials now feel that the RBI may execute a lower quantum of rate hikes than was earlier feared.
“The market was caught short. Rather it is not long enough, and that’s why we are seeing such a sharp fall in yields. Now people are feeling under-invested. With more and more recession and slowdown fears growing and commodity prices, including crude, correcting sharply, the comfort is there that we will not see any negative surprises such as intra-meeting rate hikes,” ICICI Securities Primary Dealership’s Head of Trading Naveen Singh said.
“The risk premium of the curve is coming off. The market now thinks the RBI could hike by 35-40 bps in August, against a sure-shot 50 bps earlier,” he said.
Dealers pointed out that the bond market had already priced in a high quantum of rate hikes and as such, there was room for the yield on the 10-year paper to head towards the psychologically significant 7.25 per cent mark in coming days.
Yield on the 10-year paper has shed a whopping 33 bps, from an over three-year high of 7.62 per cent touched on June 16.
According to treasury officials, the frenetic pace at which yields have declined over the past couple of weeks could also be attributed to market positioning.
Longer-term investors were said to have evinced a reasonable demand for bonds in the previous quarter, while traders with a shorter-term horizon were said to have shunned government securities amid a rising yield environment. Yield on the 10-year paper rose 61 bps in April-June as the RBI commenced on a rate-hike cycle.
“There was decent demand from longer-term players such as insurance companies; in fact, quite a few forward rate agreements were carried out between foreign banks and insurance companies in the previous quarter. It was the traders who had squared off positions. Now with the rate view changing, they are coming back,” a treasury official at a foreign bank said.
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