High inflation, govt borrowing to keep pressure on bond yield

High inflation and elevated government market borrowing is expected to keep up the pressure on bond yield ahead of the Reserve Bank of India's (RBI) second quarter monetary policy review.

Dealers said there is also push from a weak rupee that will force oil companies to raise fuel prices.

The fiscal deficit above five per cent will also add to pressure on the market.

RBI is expected to raise the policy rate by 25 basis points on October 25, keeping the option open for more.

On Friday, the yield on 10-year benchmark bond closed three basis points higher at 8.82 per cent from its previous close.

It had closed at 8.78 per cent on October 7.

A bond dealer with an associate bank of SBI said everything is loaded for yields to move up in the coming week. The inflation numbers are high. The pressure from higher borrowings is expected to keep yields up.

However, even mildly positive comments in the RBI policy review would put yield on the defensive.

There are no signs of downtrend in the headline inflation, despite significant spike in operative policy rate from 3.25 to 8.25 per cent since March 2010.

J Moses Harding, head, global markets group, IndusInd Bank, said the tone of RBI continues to stay hawkish.

The demand-supply situation has worsened with huge pipe-line supplies (sale of bonds in October 2011-March 2012).

There is also pressure on resources.

The liquidity for the reporting week remained to an average of negative Rs 41,000 - 76,000 crore range.

RBI injected net Rs 79,770 crore through liquidity adjustment facility on Friday, compared to Rs 75,885 crore on Thursday.