Benchmark 10-Year G-Sec Yield Drops to Three-Year Low as Rupee Hits Record Low

The yield of the benchmark 10-year Government Security (G-Sec) has reached its lowest level in nearly three years, driven by anticipations that the Reserve Bank of India (RBI) may introduce temporary measures to enhance liquidity in the financial system. Additionally, the Indian Rupee (INR) has also depreciated, closing at an all-time low against the US Dollar, largely influenced by strong dollar demand and the continued pressure from importers.

Expectations for RBI Measures Amid Tightening Liquidity

The recent decline in the G-Sec yield to 6.6845 percent—from a previous close of 6.71 percent—indicates growing market sentiment towards a potential tightening of liquidity later this month. With Goods and Services Tax (GST) payments and advance tax outflows on the horizon, the liquidity is expected to dwindle. Consequently, market observers are speculating whether the RBI will respond by implementing measures such as a temporary reduction in the cash reserve ratio or increasing the frequency of variable rate repo auctions. They might also resort to dollar-rupee swaps to manage the situation.

Rupee's Decline and Global Factors

The Indian Rupee closed at a record low of 84.74 against the US Dollar, reflecting a slight drop from the previous close of 84.70. During the day, it even dipped to 84.76. Market experts attribute this short-term pressure on the Rupee to a mix of domestic economic conditions and global market trends. While the Dollar Index has receded slightly, recent resilient economic data from the US suggests a stable economic scenario, which in turn might lead to a diminished scale of anticipated Federal Reserve rate cuts in 2025.

Impact of Foreign Institutional Investor Outflows

Although outflows of Foreign Institutional Investors (FIIs) have slowed compared to previous months, the overall valuation levels of the Indian equity market remain high. This ongoing situation pushes these investors to withdraw funds from the Indian markets, leading to further depreciation of the Rupee. The comments made by the newly elected US President regarding tariffs and currency challenges have intensified pressure on the Indian currency. Hemmed in by both internal and external factors, the RBI faces challenges in effectively supporting the Rupee due to prevailing liquidity constraints in the banking sector.

yield, liquidity, rupee