Inflation to be the trigger for bonds

With mixed signals coming from the Union Budget, traders expect inflation to be the main trigger for the bond markets, going ahead. The yield on the 10-year G-sec is expected to hover between 7.80 per cent and 7.95 per cent in the coming week. By the time the borrowing programme for the next financial year starts, yields are expected to breach the 8 per cent market.

“While the budget was overall positive, the hike in fuel prices, oil prices and excise will be seen as inflationary,” said the treasury head of a foreign bank.

Bond dealers said while the borrowing figure outlined in the Budget was according to the expectations, it will be a challenge to manage the government borrowing programme in the next financial year.

Retail prices of automobile fuels were hiked on Friday after the government increased the excise duty on petrol and diesel by Re 1 a litre. The price rise is expected to further push up inflation.

WPI-based inflation rose to 8.56 per cent in January, higher than Reserve Bank of India’s (RBI’s) forecast of 8.5 per cent inflation by the end of March.

Most bond traders are now certain RBI will hike interest rates in its Policy Statement for 2010-11, due April 20, to combat inflationary pressures.

Rupee may strengthen
With the Budget going down well with investors, the rupee is expected to strengthen against the dollar.

“We are bullish on the rupee. We expect it to dip below 46 by the end of the financial year and reach the 43 level in December,” said Ananth Narayan, managing director, financial markets at Standard Chartered Bank.

According to Moses Harding, head of global markets at IndusInd Bank, the rupee will move in the 45.85-46 range in the coming week. The fact that the short-term large ticket pipeline of ECBs and FCCBs is strong will further support the rupee, Harding added.

Call money rates to inch up
With the second stage of the cash reserve ratio hike to come into effect from this fortnight, bankers expected a squeeze in excess liquidity which will put slight pressure on call money market rates.

Call money rates are expected to move in the 3.35-3.5 per cent range next week.

Advance tax payments in the second half of March will also take money out of the system.

The first stage of a 50-bps hike came into effect on February 13, while the second one will take effect on Saturday.