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Indian bonds, rupee fall in 2021, weighed down by high oil, inflation

The benchmark 10-year bond yield ended at 6.45%, down 2 basis points (bps) on the day. For the year, however, the yield rose 55 bps, after falling 66 bps in 2020 and 82 bps in 2019.

December 31, 2021 / 04:38 PM IST
Representative image

Representative image

Indian bonds and the rupee weakened in 2021, weighed down by sharply higher crude oil prices which pushed up inflation and raised concerns over potential interest rate increases.

On Friday, however, India's benchmark 10-year bond yield eased after the Reserve Bank of India sold less than a third of the bonds on offer and rejected all bids for two papers including the benchmark bond, signalling its unease over current high yields.

The benchmark 10-year bond yield ended at 6.45%, down 2 basis points (bps) on the day. For the year, however, the yield rose 55 bps, after falling 66 bps in 2020 and 82 bps in 2019.

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"While RBI has kept rates unchanged to support growth impulses, we envisage a series of gradual rate hikes over the next year," said Sandeep Bagla, chief executive officer at Trust Mutual Fund.

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"In a rising rate environment, investors are advised to take exposure to shorter duration portfolios to avoid any large mark-to-market impacts," he added.

Traders said an overhang of debt supply amid rising crude oil prices and high retail inflation will keep upward pressure on bond yields.

"The rejection of bids at the auction shows RBI's discomfort with high yields but unless they announce some concrete steps to support markets, yields will head higher again," a senior trader at a private bank said.

Traders expect the central bank to announce a simultaneous buy long-end and sell short-end bond auction or 'operation twist' to aid investor sentiment.

Oil prices edged down on Friday but were set to post their biggest annual gains in 12 years, spurred by the global economic recovery from the COVID-19 slump and producer restraint, even as infections surged to record highs around the world.

The rupee also gained on the last day of the year, ending at 74.33 per dollar against its previous close of 74.41. It saw its biggest monthly rise against the dollar since August, gaining 1.1%, but fell 1.7% on the year.

The rupee has firmed in recent sessions tracking a rise in domestic shares and aided by hedging by exporters. [.BO]

"Amid rising global headwinds, we expect the INR to continue to trade with a downward bias in the near term," economists at Credit Suisse wrote in a recent note.

"Nevertheless, we do not expect significant downside as India's domestic fundamentals remain favourable. The performance of $/INR over the medium term could remain range-bound," they added.
Reuters
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