Benchmark yield stays below 8%, off days' low

The yield on the benchmark 10-year government paper remained below 8 per cent today, though it came off lows as traders booked profits, positioning for the upcoming industrial and inflation data.

By afternoon, the yield on the 6.35 per cent government security maturing in 2020 rose to almost 8 per cent, off the day’s low of 7.94 per cent. Trading closed with the yield at 7.98 per cent, marginally higher than its close of 7.96 per cent on Tuesday.

It went up to 8.02 per cent on Tuesday, matching the 17-month high hit on Monday.

Dealers said they were waiting for the January industrial output data due on Friday and February inflation data on Monday for cues on the central bank's monetary policy review due on April 20. It is widely expected the Reserve Bank of India will resort to further monetary tightening in April. In a presentation, Citi India economists Rohini Malkani and Anushka Shah said RBI would increase policy rates by at least 125 basis points in 2010 “to tilt from enabling growth to managing inflation”.

Traders are also waiting to know how much the government will borrow in the first half of the next financial year, starting with RBI and government officials expected to meet later this month to finalise the borrowing calendar. The Centre has budgeted its gross borrowings in 2010-11 at Rs 4,57,000 crore, which is Rs 6,000 crore higher than last year’s.

The market is worried that the large government borrowing may put pressure on yields, especially with the cushion of market stabilisation scheme (MSS) bonds unavailable this year. Outstandings under MSS are estimated at Rs 7,700 crore, through the Citi report said the level could rise if more bonds were issued to counter the rise in capital flows.

But, overall yields were expected to go up, given the rise in inflation and banks might have to deal with a bigger hit on their bond portfolio, dealers said.