Mumbai: Yields on the 10-year government bonds hit over 8% in the opening session on Friday, first time since December 2014, but soon declined ahead of weekly bond auction due later in the day.
At 9.15am, the 10-year bond yield stood at 7.978% from its Thursday’s close of 7.993%. Bond yields and prices move in opposite directions.
Traders await the outcome of key events, including the Group-of-Seven (G-7) summit and policy reviews by major central banks.
Trade discussions are likely to take centre stage at the G-7 meeting after US President Donald Trump lashed out at Canada and France over tariffs.
Moreover, the Bank of Japan, the European Central Bank and the Federal Reserve will review policy rates next week, Bloomberg reported.
The benchmark 10 year bond yields have jumped nearly 15 basis points this week after the Reserve Bank of India (RBI) raised key interest rates and changed liquidity coverage norms.
“RBI announced an important regulatory change in Wednesday’s monetary policy review, which reduces banks’ demand for government bonds by around 2% of aggregate deposits. We estimate that is equal to roughly Rs2.3 trillion. While the market was expecting a move along these lines, government bond yields are likely to rise as the market reacts to the change over time”, said Abhishek Gupta, economist at Bloomberg.
“At face value, the RBI eased the regulatory requirement for banks pertaining to liquidity. Digging deeper into the rules, the move is likely to accentuate concerns of oversupply and banks’ unwillingness to hold government bonds in excess of the requirement”, Gupta added.
Analysts expect RBI to hike another 25 basis points in the next policy.
On Friday, the government will hold Rs12,000 crore auction and will also conduct 7-day reverse repo for a total of Rs 40,000 crore.
The bond prices were already under pressure due to external volatility such as rise in US bond yields, oil prices, geopolitical concerns and a trade war threat. Slowing inflows into local financial markets and the widening current account deficit have also dampened sentiment.
Meanwhile, the rupee weakened nearly 0.5% to 67.48 against US dollar tracking losses in Asian currencies.
So far this year, the rupee has weakened 4.86%, while foreign investors have bought $241.20 million and sold $4.48 billion in equity and debt markets, respectively.
Benchmark Sensex Index fell 0.16% or 56.61 points to 35,406.47. Since January, it has gained 4.13%.