Bond yields rise as WPI inflation for July shoots up

Yield on 10-year bond ends at 14-month high

Bond yields shot up on Wednesday after wholesale price index (WPI) inflation rose to a four-month high of 5.79 per cent in July, much above market expectations. The rupee’s depreciation resulted in rise in import costs, adding pressure on the Reserve Bank of India (RBI) to sustain liquidity tightening measures to support the currency.

The yield on the 10-year benchmark government bond 7.16 per cent 2023 rose to 8.55 per cent before closing the day at 8.50 per cent. The yield had ended at 8.40 per cent on Tuesday. The yield had ended at 8.50 per cent on May 31, 2012.

According to government data released on Wednesday, WPI inflation rose to 5.79 per cent in July compared to 4.86 per cent in the previous month as food items, particularly vegetables, turned costlier. Earlier this week, consumer price index (CPI) data was released. However, CPI inflation declined to 9.64 per cent in July from 9.87 per cent in the previous month.

However, according to experts, CPI still remains a concern. “WPI inflation is worrisome. But the focus shifting to CPI inflation is a bigger worry. If we remove the rupee-dollar situation, the growth situation warrants for lower interest rates,” said Sandeep Bagla, executive vice-president, ICICI Securities Primary Dealership.

On Friday, RBI will auction government bonds for a notified amount of Rs 16,000 crore. There are four bonds on offer. However, the Street is skeptical about the auction sailing smoothly. “There may be partial devolvement in the auction. The rupee is also not stabilising due to the RBI moves. That gives a signal that RBI might continue with its liquidity tightening measures for more time,” said Balginder Singh, a government bonds dealer at Andhra Bank.

RBI is also auctioning cash management bills for a notified amount of Rs 22,000 crore every week and that is adding to further pressure on the liquidity scenario.

RBI's objective is to contain WPI inflation to five per cent by March 2014 and the Street feels there might be no more repo rate cuts in the current financial year. According to government bond dealers, the yield on the 7.16 per cent 2023 will continue to trade above the eight per cent level in the near term.