Yields on 10-yr bond highest since Oct '08

The central bank set a cut-off at 8.43 per cent on the government bond 7.80 maturing in 2021

Expectations that the Reserve Bank of India (RBI) may continue making funds dearer to tame inflation and increased government borrowing have sent yields on the 10-year benchmark government bond to 8.45 per cent.

This is the highest level since October 2008. After rate cuts by RBI during the recession, the yields on the 10-year benchmark bond had fallen to 5.24 per cent in January 2009.

RBI set a cut-off at 8.43 per cent on the government bond 7.80 maturing in 2021, which was auctioned today. “The high cut-offs indicate that the market is expecting yields to inch up further,” said a bond dealer with a domestic brokerage firm.

Lately, the government has been borrowing more than planned through short-term instruments like the cash management bills and treasury bills. This week, the government borrowed Rs 12,000 crore though long-term bonds and Rs 11,000 crore through treasury bills. State development loans worth Rs 3,800 crore were also auctioned this week.

Yields are expected to harden further before stabilising. “At the moment, I feel we may be near the peak and the level of 8.55 per cent may not breach, as it will be a good level for investors to buy the 10-year benchmark,” said Pradeep Madhav, managing director, STCI Primary Dealer.

Stubbornly high inflation has fuelled speculations that RBI will increase rates in the mid-quarterly policy review, due on June 16.

“The market is expecting a policy rate rise of at least 25 basis points in the forthcoming mid-quarter policy review,” said Pawan Bajaj, deputy general manager-treasury, Bank of India.

The repo rate, the rate at which banks borrow from RBI, is at 7.25 per cent currently.

On May 3, RBI had raised policy rates by 50 basis points. This was the ninth rise since March 2010 aimed at controlling inflation.

India’s inflation indicator, the Wholesale Price Index, stood at 8.66 per cent in April. The food inflation data, published every week, showed rising prices of fruits, onion, pulses and wheat took food inflation to 8.55 per cent for the week ended May 14, as against 7.47 per cent a week ago. This, accompanied with the impending fuel price rises have added to inflationary expectations.