Bond yields continue to trade high despite softening inflation

This, as liquidity continues to remain tight

Despite the softening inflation, bond yields continue to be high, owing to tight liquidity.

On Wednesday, the yield on the 10-year benchmark bond ended at 7.71 per cent, flat compared to Monday’s close. In early trade, the yield touched 7.72 per cent.

The bond and currency markets were closed on Tuesday on the occasion of Maha Shivaratri.

Falling fuel prices dragged down Wholesale Price Index (WPI)-based inflation to -0.39 per cent in January, the second month to record a fall in prices this financial year, though food items remained expensive.

In December, inflation stood at 0.11 per cent.

Data released last week showed Consumer Price Index (CPI)-based inflation stood at 5.11 per cent in January, against 4.28 per cent in December. Though CPI inflation rose, it was at a level with which the central bank was comfortable.

The base year for the CPI was revised from 2010 to 2012.

“Liquidity continues to be tight. Besides, we have seen some spike in global oil prices. Ahead of the close of the financial year, banks are not keen on building positions in bonds,” said Anoop Verma, vice-president (treasury) at DCB Bank.

The Union Budget is set to be presented on February 28 and there is concern the government’s gross market borrowings might be on the higher side, owing to bond maturities due next financial year.

On Wednesday, the rupee ended at 62.34 per dollar, close to levels last seen on January 8 (62.67), against its previous close of 62.16 per dollar.

“Ahead of the Budget, there was dollar demand from corporates. The rupee is biased towards weakening. It might not appreciate beyond 62, at least for the rest of this month. It might weaken to 62.8 a dollar,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai.