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Benchmark yield hits 12-week high on S&P's downgrade warning

Benchmark bond yield gained five basis points to close at 6.76 per cent on Wednesday.

Updated: Dec 11, 2019, 08.50 PM IST
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The rupee strengthened to 70.84 a dollar, up 12% from its previous close.
Mumbai: The yields on government’s 10-year treasury bill surged yet again on Wednesday to close at a 12-week high, as market traders, partly spooked by global rating agency S&P’s warning over a possible downgrade of India’s sovereign rating, continued their selling spree.

"If this (GDP) recovery does not materialize, and it becomes clear that India's structural growth has significantly deteriorated, we could lower the rating," S&P Global Ratings credit analyst Andrew Wood said on Wednesday. The rating agency also forecast the real GDP growth to further decelerate to 5.1%.

The yields gained five basis points on Wednesday to close at 6.76 per cent. The benchmark yield has now surged 27 basis points in five trading sessions since the Monetary Policy Committee (MPC) unanimously decided to keep repo rates on hold on Thursday; a decision which largely belied market expectations given the sluggish economic performance in recent times.

One basis point is 0.01 percentage point. Bond yields rise when prices fall.

“A lot of positions got built along the yield curve in shorter and longer end bonds. Now one doesn’t know. The food inflation is set to remain high…there are a lot of uncertainties which is something the markets don’t like,” said Sandeep Bagla, associate director at Trust Group. “People might as well sell and stay out because the interest curve is getting steeper and bearish.”

RBI has forecasted inflation in the second half of the current fiscal to be in the range of 5.1-4.7% as against the previous estimate 3.5-3.7 percent, which has led many market participants to believe that the rate cut pause taken by the central bank could be prolonged. RBI also sharply reduced its growth forecast for 2019-20 to 5 percent from 6.1 percent. India’s economy grew at 4.5% in July-September, the weakest pace in more than 6 years.

Furthermore, bond street traders may also have been wary of taking any fresh position before the release of consumer price index (CPI) inflation figures for the month of November on Thursday, market observers pointed out.

“It is almost a belated realization in the market that fiscal space for policy action is now constrained,” said K Harihar of FirstRand Bank.

Meanwhile, the rupee strengthened to 70.84 a dollar, up 12% from its previous close.
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