Samvat 2078: More bang than whimper for rupee, bond this new year

It was a Samvat like no other for the Indian bond market. Be that as it may, Samvat 2078 could be even more interesting for the rupee, say experts.

The 10-year bond yield was at 5.88 per cent at the beginning of Samvat 2077 - a result of the Reserve Bank of India’s (RBI's) extraordinary liquidity measures and active intervention to keep yields below 6 per cent to make it easy for the government and the corporate entities to borrow. The 10-year yields closed at 6.34 per cent on Wednesday - a rise of 48 basis points.

By the end of Samvat, although the RBI had relaxed its tight grip on the market, it had stopped additional liquidity infusion. It is expected to make liquidity draining operations more durable, mainly through simultaneous secondary market bond sales sometime later in the year.

“With Covid cases on the wane, the RBI will likely withdraw super-easy monetary policy for a normal market-driven one,” said Debendra Dash, head of asset-liability management at AU Small Finance Bank (SFB).

“Although a repo rate hike is unlikely in the near future, the withdrawal of liquidity will push up short-term rates,” said Dash, adding that the 10-year bond yield will likely to trade between 6.25 per cent and 6.5 per cent in the months to come.

Gopal Tripathi, head of treasury at Jana SFB, also expects bond yields to reach as much as 6.45-6.5 per cent by March, even as they could strengthen back to 6.15 per cent under favourable conditions. One positive factor for the bond in the coming year could be the government bonds’ inclusion in global bond indices. This is expected to bring at least $30 billion to the Indian debt market as the investor base widens.

In the case of the rupee, Samvat 2077 ended on a better note. The rupee was at 74.61 to a dollar on November 13 - the beginning of Samvat. It ended at 74.46 to a dollar on Wednesday.

The rupee, however, is locked in a chokehold. Rising commodity prices and the end of easy-money policy weigh negatively on the rupee, whereas the long pipeline of initial public offerings and the index inclusion of bonds would be a positive for the Indian currency.

“In the new Samvat, we are expecting the appreciation of the rupee to be limited up to 73.8 to 74 levels and the overall bias to remain on the weaker side, with potential depreciation veering towards 76.5 to 77,” said Amit Pabari, managing director, CR Forex.

“For the US dollar index, we are expecting a steady upmove towards 100 due to favourable US factors and unfavourable global factors. These include the US Federal Reserve tapering, stronger US growth, the energy crisis in the European Union and the UK, political idée fixe in Germany, rising crude oil and other energy prices, which could lead to higher inflation and widening trade deficit for major nations,” said Pabari, adding the RBI will continue to buy dollars and manage the exchange rate to give higher dividends to the government.

The US Fed’s decision on taper will have ramifications on the emerging markets, and India is not impervious. However, unlike 2013, this time the taper has been well communicated in advance and the RBI is prepared to face any adverse challenge, thanks to a huge build-up of foreign exchange reserves and a comfortable current account (deficit at 1 per cent of gross domestic product) position, add experts.