Fall in bond yields continue

Expectations of a further softening of retail inflation sees yields dip

The bond market rally is seen continuing this week, due to expectations of further softening in retail inflation for November. The Consumer Price Index (CPI)-based inflation for November will be released on Friday.

Experts believe retail inflation in November might soften even below the five per cent mark, due to which bond yields could fall further. The yield on the 10-year benchmark bond dropped below the repo rate of eight per cent last week after the Reserve Bank of India (RBI) announced its fifth bi-monthly monetary policy review, in which the central bank made dovish statements.

“The yield on the 10-year bond may trade in the range of 7.9 per cent to eight per cent this week. Banks’ treasury profits for this quarter are likely to be better than last quarter due to falling yields,” said Ashutosh Khajuria, president (treasury), Federal Bank.

The yield on the 10-year benchmark bond ended at 7.94 per cent on Friday, compared with the previous close of 7.97 per cent. “We expect the November CPI inflation around 4.5 per cent. The demand for bonds is going on with an expectation that we are entering a rate cut cycle,” said a senior treasury official of a foreign bank.

Due to sharp fall in oil prices since the end of June, retail inflation softened to 5.52 per cent in October, the least since the index was created in early 2012. RBI has revised the CPI-based inflation target to six per cent, from eight per cent earlier, for March 2015. Meanwhile, the rupee is seen trading range-bound this week. Currency dealers believe the broad trading range will be between 61.50 to 62.50 this week. The rupee ended at 61.79 on Friday, compared with the previous close of 61.94 to a dollar.