December drift
 

The yield on the 10-year benchmark government security (G-sec) opened at 6.71% and closed at 6.76%, up 1 basis point (bp) from its November close of 6.75% and within Crisil’s forecast of 6.69-6.79%.

Domestic bond prices remained positive for most of the first week of December, driven by expectations of a potential policy rate cut. Additionally, foreign-investor participation supported gilt prices, with a decline in US Treasury yields providing further support. However, market sentiment took a hit on Friday after the RBI-MPC decided to maintain policy rates and slashed the cash reserve ratio (CRR) by 50 bps to 4% from 4.5% to boost liquidity in the financial system. Further, weak demand for 15-year securities at the weekly G-sec auction exerted additional pressure on bond yields. The 10-year benchmark G-sec closed the first week at 6.74%.

Bond prices remained bullish at the start of the second week, fuelled by hopes of a policy rate cut following the appointment of the new RBI governor. The CPI data for November 2024 printed lower at 5.5%, compared with the previous reading of 6.2%. Later during the week, a rise in the US Treasury yields due to a rise in inflation data exerted pressure on bond prices. Stronger-than-expected demand at the weekly G-sec auction lent support to the bond market. On average, liquidity in the system was ~Rs 38,746 crore surplus. The 10-year benchmark G-sec closed the week at 6.73%.

In the third week, bond prices declined slightly, driven by a higher US Treasury yield. On Thursday, the US Fed cut its policy rates by 25 bps, marking a third consecutive rate cut in 2024. However, the US Treasury yields rose further, following the US Fed’s hawkish commentary during the FOMC meeting, which exerted pressure on bond prices. The interest-rate differential between India and the US narrowed to 240 bps because of higher US Treasury yields, leading to a sell-off in the market by foreign portfolio investors (FPIs). On average, liquidity in the system was ~Rs 1.49 lakh crore in deficit, which exerted pressure on bond prices. The 10-year benchmark yield closed for the week at 6.79%.

In the fourth week, bond prices traded in a narrow range and with muted volume amid the Christmas holiday season. A surge in US Treasury yields and the rupee’s depreciation against the dollar weighed on the bond prices to some extent. The benchmark 10-year yield closed for the week at 6.76%.