Bond yields ease

Yields on government bonds eased on Monday, owing to lower-than-expected inflation. Inflation, as measured by the wholesale price index (WPI), rose 7.25 per cent in June, compared with 7.55 per cent in May. Markets had factored in the possibility of an uptick in inflation. “June WPI eased to 7.25 per cent against our expectation of 7.6 per cent,” said Madhavi Arora, analyst at Karvy Stock Broking.

On Monday, yields on the 10-year benchmark government bond closed at 8.05 per cent, compared with 8.1 per cent on Friday. Yields fell to an intra-day low of eight per cent after the inflation data was released. Concern that inflation may bounce back in July prevented a further fall in yields.

However, Leif Eskesen, chief economist for India and the Association of Southeast Asian Nations, HSBC, said, “Headline inflation eased more than expected in June, but core inflation held steady. Given the lingering upside risks to inflation, Reserve Bank of India (RBI) is not likely to be eager to cut (rates).”

RBI is scheduled to announce the first quarter monetary policy review on July 31. It had kept policy rates unchanged in the mid-quarter review of monetary policy in June, citing upside risks to inflation. In April, the central bank had unexpectedly cut the policy rate by 50 basis points.

“RBI may look at weak economic growth and draw comfort from the stable core inflation,” said a bond dealer with a large public sector bank. Last week, yields had eased from 8.15 per cent levels, when growth in industrial production for April was revised downwards to -0.9 per cent from the provisional estimate of 0.1 per cent.

On Monday, rates on overnight indexed swaps eased by about 10 basis points across maturities. Banks borrowed Rs 56,200 crore from RBI’s liquidity adjustment facility. The weighted average call money rate closed at 8.1 per cent, compared with 8.3 per cent in the previous close.

With liquidity conditions at ease, markets do not expect RBI to conduct open market operations this week. The central bank is scheduled to auction Rs 15,000 crore of dated government securities for sale on Friday.