In the last 20 years, UNR has declined steadily against the USD while 10 years g-sec yields have come off from double digit levels seen in 2000. However, g-sec yields have been unable to sustain significant fall, notably in 2009 and in 2020.
The current pattern of USD/INR and g-sec movements indicate that 10-year g-sec yields will see more uptrends than downtrends until the USD/INR pair stabilises.
During Jan-2009, 10-year g-sec yields declined to a record low due to rate cuts by RBI to mitigate the impact of global recession. At that time, USD INR hit the lowest level at 49 when benchmark yield stood at 5.6%. However, after that, g-sec yield exhibited an uptrend while USD INR fell further to the level of 51 as of March 2009 when g-sec yield came in at 6.7%. From there, USD INR recovered to the level of 45 during March 2010 when g-sec yield rose to 8%.
During 2013, while g-sec yield fell from 8% to 7.21% in the first half of year and then rose to 8.82% as of Dec 2013, USD INR rate rose from 55 to 62.
In the current economic scenario, USD INR exchange rate is trading at record lows driven by factors like high inflation and Fed rate hike. RBI has already taken steps to hike policy repo rates to combat inflation and to cope with global rate hikes. More rate hikes are on the cards by the central bank. It is expected that inflation will stay in the range of 6% to 7% in the next 6 months. After that it will come down. Therefore, given possible rate hike and a downward trend of inflation, USD INR is likely to fall further before stabilising while g-sec yield will maintain an uptrend and stabilise at higher levels.
Government bonds, SDL and OIS yield movements
Last week, 10-year benchmark 6.54% 2032 paper yield came down by 11 bps to 7.44%. The 5-year benchmark bond, 6.79% 2027 yield declined by 11 bps to 7.24%. 6.64% 2035 yield decreased by 15 bps to 7.55%. Long-term paper, 6.99% 2051 yield decreased by 15 bps to 7.70%.
The spread of 10-year bond over 5-year bond remained steady at 20 bps seen in the previous week. The 15-year benchmark over 10-year benchmark spread came down to 10 bps from 13 bps while the 30-year benchmark over 10-year benchmark spread declined to 26 bps from 30 bps on a weekly basis.
10-year SDL auction cut-off declined to 7.88% from 7.95% in previous week while spread increased to 40 bps from 36 bps.
On a weekly basis, 1-year OIS yield declined by 12 bp to 6.35% while the 5-year OIS yield came down by 32 bps to 6.94%.
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