Mumbai: The yield on 10-year government bonds dropped 13 basis points on Wednesday, falling for the second consecutive session, after crude oil prices fell to a 16-month low and the Reserve Bank of India announced open market operation.

The 10-year bond yield declined 13 basis points to close at 7.224%, a level last seen on 9 April from Tuesday’s close of 7.347%. Bond yields and prices move in opposite directions.

Crude oil prices fell over 7% to hit a low last seen on August 2017 amid concern over supply glut and pessimism due to the trade war and slowing global economic growth. Year to date, crude oil prices are down 15.3% — 34.5% from their 2018 peak of $86.29 per barrel seen on 3 October.

“Low oil prices are a clear positive for the Indian economy, even though the domestic fuel tax structure only allows partial pass-through of the sharp correction in international benchmarks," according to Radhika Rao, economist at DBS Bank, in a 14 December note. “For India’s external balances, lower oil prices imply some reprieve on the FY19 current account and balance of payments position."

Rao expects if oil prices average $75 per barrel this year, the current account deficit is likely to be around 2.5% of GDP, better than the earlier forecast of 2.7%. Balance of payments will narrow to $15-20 billion, from the earlier $25 billion.

The RBI on Tuesday announced it will purchase more government securities under open market operations for a total amount of 50,000 crore in January 2019, which also improved sentiment.

All eyes are on the decision on interest rate hike that the US Federal Reserve is due to take later today. Analyst expects the US central bank to give a guidance on the rate outlook for 2019.

Continued buying interest from foreign investors in both equity and debt markets also helped the local currency. FIIs bought $1.76 billion in November and so far $677 million in equity and debt in December.

According to Care Ratings, a fair rate for the rupee based on current conditions would be around 70-71 per dollar assuming foreign portfolio investments are increasing and trade deficit is under control.

So far this year, the rupee has declined 8.7%, while foreign investors have sold $4.44 billion and $7.34 billion in the equity and debt markets, respectively.

Meanwhile, the rupee erased gains after Bloomberg reported that some big firms, including an oil company, were seen buying dollars to pay oil importers. The home currency closed at 70.40, up 0.06%, from its previous close of 70.45 a dollar.

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