Bond yields down in India

K.T.Jagannathan

A day after India reported the steepest ever contraction in GDP (gross domestic product), the markets witnessed quite an action on all fronts.

Key stock indices zoomed, the Indian rupee posted its biggest single-day gain in 21 months, and bond yields fell to its lowest levels in two weeks.

Amidst this, all-round action, the headline seasonally-adjusted IHS Markit India Manufacturing Purchasing Managers’ Index rose to 52.0 in August from 46.0 in July, above the 50-level separating growth from contraction for the first time since March.

The benchmark 10-year bond yield dropped to close at 5.94%. The Reserve Bank of India, on Monday, said that it would purchase and sell government bonds simultaneously through two more tranches of open market operations in its ‘Operation Twist’. It also eased the held-to-maturity (HTM) limits for bond holdings by banks.

Indian Rupee firms up against US dollar

The RBI indicated that the recent appreciation of the rupee was working towards containing imported inflationary pressures. This observation sort of made traders to presume that the RBI would moderate its aggressive buying of dollar purchase.

The partially convertible rupee ended the session at 72.8625/8725 a dollar compared with 73.61 at the previous close. It rose to a high of 72.76, its strongest since March 3. Its 1% gain on the day is its best since December 18, 2018.

Consistent operation twists and relaxation in the HTM limit are helping to flatten the yield curve.

Indeed, the GDP contraction was more than bargained for. Perhaps, this was aiding the sentiment for bonds. Given the dismal GDP number, there are fresh hopes that the RBI would cut the interest rates in the coming months. On Monday, India reported that its economy had shrunk 23.9% in April-June.

Gains return to bourses

The Indian bourses, in the meanwhile, regained ground on Tuesday after a massive fall on Monday, triggered primarily by the fresh stand-off at the border between India and China. Sensex gained 272 points on the first day of September to end at 38,900. The benchmark index had touched the day's high of 39,226.82 after the country’s highest court granted telecom operators 10 years for staggered payment of AGR (adjusted gross revenue)-related dues. Nifty closed at 11,496 points, up 100 points, or 1%. On the index, 35 stocks gained, while 15 declined. Nifty Bank, Metal, and Pharma were the biggest sectoral gainers.