Bond yields plunge, rupee gains as easing crude oil buoys markets

Government bond prices surged on Monday, with yield on the 10-year benchmark paper dropping 10-basis points (bps). This comes as a sharp decline in global crude oil prices eased some worries over elevated domestic inflation, treasury officials said.

The softening of crude prices also buoyed the domestic currency, which regained some ground after settling at a record closing low on Friday.

Yield on the 10-year benchmark 6.54 per cent 2032 paper nosedived by 10 bps to close at 7.44 per cent or Rs 93.90.

Bond prices and yields move inversely and a decline of 1 bps on the 10-year paper corresponds to a rise of roughly 7 paise.

The rupee ended the day at 77.98 to a dollar against a close of 78.07 on Friday.

It has weakened close to 4.5 per cent against the dollar so far in 2022, amid rate hikes by the Federal Reserve and large overseas investment outflows from Indian stocks.

Brent crude futures slumped around 7.3 per cent in the previous week, while WTO futures plummeted more than 9 per cent. This comes as concerns over a global slowdown in economic growth eroded demand.

“The rally is because of the fall in crude oil prices and generally a trend of disinflation in some commodity prices,” ICICI Securities Primary Dealership’s head of trading Naveen Singh said.
 

Crude oil prices were volatile on Monday, with Brent crude futures trading 38 cents lower at $112.74 per barrel at 10:22 GMT, Reuters reported.

Earlier this month, India’s crude oil basket hit a 10-year high of $121 per barrel. This significantly increased upside risks to inflation and the current account deficit, given that the country is a huge importer of the commodity.

While high domestic inflation warrants rate hikes by the Reserve Bank of India, bond traders pinned their hopes on oil prices continuing to ease. This could limit the degree of monetary tightening by the central bank.

Concerns over a global growth slowdown, which could prompt central banks to scale down tightening plans, also lent a helping hand to bonds.

“The short-end of the curve has inched up considerably but people are betting on the longer end because of recession fears. It seems that within 12-18 months, we could have a recession. So, the yield curve is flattening,” Singh said.

Latest data showed that India’s headline retail inflation rose by 7.04 per cent in May. This is well above the RBI-mandated band of 2-6 per cent for the price gauge.

The RBI has hiked the repo rate by 90 bps to 4.9 per cent since May. It was raised by 40 bps in an unexpected move on May 4 followed by a 50-bps hike at its June policy review.