MUMBAI: Bonds fell to a pre-pandemic low on Monday even as the sensex surged over 1% to close 651 points higher and the rupee gained 27 paise. The cost of borrowing for the government, as reflected in the yield on 10-year bonds, rose to more than the home loan rates offered by most banks to a two-year high of 6.59%. While Union Bank of India’s loans start at 6.4%, Bank of Baroda is offering them at 6.5%.
Bond prices have an inverse relationship with yields, so one falls even as the other rises. In equities, the markets opened strong, tracking Asian stocks and closed higher on expectations that there would be a pro-growth Budget. The Nifty, too, scaled 18,000 to close 1.1% higher at 18,003. However, analysts forecast volatility as the Omicron variant continues to spread rapidly.
The rupee rallied to a two-month high bolstered by inflows. The domestic currency closed stronger at 74.04, up from Friday’s close of 74.31 against the dollar — the highest since November 9. A record fund-raise by Reliance Industries and other capital inflows are expected to keep the dollar under check.
Bond markets, however, saw a selloff. The 6.59% yield on the 10-year bond is the highest since January 31, 2020. The benchmark 10-year bond had closed at 6.54% on Friday. Sentiment in the bond market has changed after the RBI became a net seller of bonds — a move seen aimed at supporting measures to normalise the excess liquidity pumped in to help markets during the pandemic. Bond yields rose ahead of December inflation numbers, which are expected on Wednesday.
Dealers also have a negative outlook on inflation with global oil prices firming up over concerns of supply constraints because of geopolitical tension in Libya and Kazakhstan. Additionally, bond yields rose because of a surge in US yields. A drop in unemployment in the US is expected to prompt the Federal Reserve to hike rates earlier than expected.
In the domestic market, the sensex opened sharply stronger at 60,070 and surged to a high of 60,427 in intra-day trade. Bank stocks were among the key gainers. During the day, there were rumours that the government might hike foreign investment limit in public sector banks to 74%. Among lenders, SBI gained the most (2.5%) on anticipation of better Q3 results. HDFC (2.4%), Kotak Bank (2.3%), ICICI Bank (2.2%) and Axis Bank (1.7%) were the other significant gainers.
However, the gaining rupee also took its toll on some stocks. Wipro slumped 2.5% and was the biggest loser among the sensex stocks. Other losers in the index were Nestle India (-1.1%) and Asian Paints (0.6%). Sun Pharma, Dr Reddy’s and IndusInd Bank also closed in the red.