On Friday, yields on the 10-year benchmark government bond headed north, as the central bank indicated it would stick to an anti-inflationary stance and also as June industrial growth data and high food inflation strengthened the case for further rate rises.
Following the US sovereign debt credit rating downgrade by Standard & Poor’s, yields fell to a three-month low of 8.15 per cent as market participants factored in a pause in the rate rise cycle earlier last week. But hawkish comments from Reserve Bank of India (RBI) officials on Friday backed with strong industrial production and high food inflation data, sent the yields back to high levels. On Friday, yields closed at 8.30 per cent, up nine basis points from earlier close.
“There is room for 25-50 basis points rise further before a pause, as the industrial growth is strong,” said Pawan Bajaj, deputy general manager, Bank of India. He expects yields to go back to 8.40-8.45 per cent levels. The Index for Industrial Production (IIP) for June 2011 came at 8.8 per cent, higher than 5.6 per cent of the previous month. Also, weekly food inflation data showed prices were higher by 10 per cent as on July 30, as compared to same period last year.
“We should also keep in mind that the IIP data has been volatile. Hence, it is difficult to draw a trend. We expect a pause in rate increases. However, a higher monthly inflation data and sharp upward revision in earlier figures may strengthen the case for further rate rises,” said A Prasanna, economist, ICICI Securities Primary Dealership. The wholesale price index-based inflation data for July will be released tomorrow.
Also, a fresh supply of government bonds with lesser trading days this week would exert upward pressure on yields. The government had decided to shift the auction of dated securities scheduled in the week ending September 23 to the week ending August 19, to modulate the cash flows.
Accordingly, bonds worth Rs 10,000 crore are to be auctioned on Thursday. The overnight indexed swap (OIS) rates also moved up last week as markets factored in the possibility of increase in policy rates. On Friday, the rates on five-year OIS closed at 6.87 per cent as compared to 6.78 per cent a day ago, while one-year OIS also closed higher at 7.71 per cent as compared to 7.50 per cent on Thursday.