Rising Bond Yields: Collateral Damage Of The Rupee Fall

The relentless fall in the rupee and the likely tapering off of the bond buying programme by the US Fed Reserve is not only impacting the Indian equity market but is also affecting the bond yields. In trades today (August 19, 2013), the 10-year benchmark government bond yield rose to 9%, a level last seen at the height of the financial crisis in 2008.

The central factor spurring such a rise in bond yield is the rupee. There has been a continuous fall in the value of the rupee against the USD, which has moved lower by over 12% in the last 3 months and currently trading at 62.61/62 per USD. This slide is primarily driven by the worsening macro-economic situation in India and continuous strengthening of the dollar as the US economy is picking up.

Such a rise in bond yields or a fall in bond value does not augur well for India Inc. It will definitely lead to a rise in the cost of borrowing, as indicated by the widening spread between corporate bonds and government bonds, which have already jumped to a one and a half year high. According to media reports, Rural Electrification Corporation, which was supposed to raise money last week, has deferred its plan due to the sudden rise in bond yields. Banks in particular will also take a hit on their investment books due to the spurt in yields.

According to market experts, if the rupee continues its free fall and RBI does not roll back its recent liquidity tightening measures, bond yields may rise further to 9.4%-9.5%. This is surely bad news, as the option of equity and bonds are both not working for them. Hence, cash remains king as of now.