10-year bond yields at decade-plus low; rupee falls as oil prices crash

The Sensex fell nearly 2,000 points, as foreign investors liquidated their investments for safe haven assets such as US bonds. As prices of bonds rise, yields fall.

The rupee crossed 74 to a dollar and 10-year bond yields fell below 6 per cent — the first time since March 3, 2009 — even as crude oil prices crashed 30 per cent overnight, taking down global markets with it.

The Sensex fell nearly 2,000 points, as foreign investors liquidated their investments for safe haven assets such as US bonds. As prices of bonds rise, yields fall. The Indian bond yields fell too, in line with other emerging market (EM) bonds. The 10-year bond yield fell 12 basis points (bps) to 6.065 per cent, from its previous close of 6.183 per cent.

“The immediate trigger for the yield movement is 30 per cent overnight oil price correction. The oil price fall is positive for India. Some of the benefits will go to the fiscal, and some will be there to contain inflation, which may come down by 25 bps due to the fall in oil prices,” said B Prasanna, group head, global markets, ICICI Bank.

The foreign portfolio investor (FPI) outflow to some extent is getting compensated by the lower demand for dollars due to the fall in oil prices. The oil marketing companies will now have to pay roughly $20 billion less on their oil bills.

“The rupee will remain under pressure alongside all EM currencies as FPI pull-out happens. But oil fall will cushion the rupee and its depreciation will be limited,” said Harihar Krishnamurthy, head of treasury, First Rand Bank.

The rupee closed at 74.09 to a dollar, the lowest since October 11, 2018 — a day when the partially convertible currency had closed at its record low of 74.48. However, “if the rupee depreciates 5-7 per cent from the present level, then most of the oil gain will be gone,” said Gopal Tripathy, head of treasury at Jana Small Finance Bank (SFB).

But chances of that are very low, because the rupee is clearly a much better performing currency than others in the region. While rupee fell 0.40 per cent against the dollar, the Malaysian ringgit, Indonesian rupiah, and the South Korean won fell more than 1 per cent.

“This is not an unusual move on a day like today (March 9). The rupee could be nearing its resistance level,” said Tripathy. In all possibility, when the coronavirus contagion stabilises, “the rupee should immediately bounce back because of low oil prices,” said Devendra Dash, head of asset-liability management at AU SFB. “The gain on crude oil is significant,” he said.

The bond yields are also reflecting an imminent cut in repo rate.

“We are looking at 25 to 40 bps rate cut by the Reserve Bank of India (RBI). If the repo is at 4.75 per cent (now at 5.15 per cent), it is possible that the 10-year yields can touch 5.75 per cent,” said Prasanna.

Bond dealers say there was profit booking once the yields fell below 6 per cent, which pushed the yields up a little bit by the time of closure.

“Globally, bonds are very costly and equities have become very cheap,” said Kumar Sharadindu, a market expert and former managing director of SBI Pension Fund.

In India, the equities will remain under pressure, but there is nothing much to panic about rupee because the RBI has formidable reserves.

“But when the global currencies are falling, the RBI is unlikely to waste its resources,” said Sharadindu.