Govt 10-year bond yield inches marginally higher as currency slide pinches

Indian government bond yields ended marginally higher to wrap up the week, tracking a sharp down-move in the local currency that weighed on overall investor appetite, while a $3.75 billion debt auction on Friday added to supply. 

The 10-year bond yield ended at 6.7852 per cent, compared with its previous close of 6.7824 per cent. 

The Indian rupee plunged against the US dollar on Friday, ending at a record low of 85.53, posting a slump of 0.3 per cent - the biggest for a single session in nearly seven months. 

 

The currency fell as dollar demand went up due to non-deliverable forwards and currency futures maturing. 

A sharp fall in the local currency also makes foreign investment into local bonds unattractive and could raise the risk of outflows. 

"On the currency front, it is difficult to see any immediate retracement, and it may move into further unchartered territory. 

This will continue to have an impact on bonds," said Mandar Pitale, head of treasury at SBM Bank India. 

"Due to high volatility in currency, we could see some impact in foreign flows. Foreign inflows will come but it will come on a selective basis and chase high-yielding debt." Trading volumes have plummeted in the last few sessions as activity had turned tepid towards the calendar year-end. 

Market participants have also remained concerned over the liquidity deficit in the banking system, which is set to widen further in the upcoming quarter. 

The 10-year US yield stayed elevated, at around 4.60 per cent mark, amid concerns regarding rate cuts in the new year. 

Underlying sentiment in the world's largest economy has turned cautious after the Fed downsized its 2025 interest rate cut forecast to 50 basis points last week. The odds of a pause in January stood at 89 per cent, according to CME's FedWatch Tool.