Bond yields might fall; rupee could weaken

Government bond yields are expected to soften this week on expectations of a repo rate cut in the mid-quarter review of monetary policy next month. This is because the index of industrial production (IIP) and the wholesale price index (WPI) inflation data came lower.

Indicating persistent sluggishness in the economy, industrial output contracted 0.6 per cent in December compared with 2.7 per cent in December 2011. And, WPI inflation fell to 6.62 per cent in January, the lowest since December 2009 compared with 7.23 per cent in January, 2012.

“The yield on the 10-year benchmark government bond 8.15 per cent 2022 is expected to trade in the band of 7.75-7.85 per cent and the bias is more towards yields falling. This is because the contraction of IIP and easing inflation give tremendous comfort to the RBI (Reserve Bank of India) to cut rates. The Street is also expecting the announcement of another open market operation purchase of gilts this week,” said Prasanna Patankar, senior vice-president at STCI Primary Dealer.

The yield on the 10-year benchmark bond ended at 7.83 per cent on Friday, compared with the previous close of 7.82 per cent.

RBI will review monetary policy again on March 19 and the Street sees a further repo rate cut of 25 basis points. In calendar year 2013, RBI slashed the repo rate 25 basis points on January 29 in the third quarter monetary policy review.

The rupee ended at Rs 54.23 a dollar on Friday compared with the previous close of Rs 53.94. “The rupee is headed towards Rs 55 a dollar this week due to dollar demand from oil importers. Oil prices are still very high. Besides, there are also gold purchases. There is also slight thinning of overseas flows,” said Mohan Shenoi, president, group treasury and global markets, Kotak Mahindra Bank.