Yields seen falling; rupee to weaken

Government bond yields are expected to fall further from current levels this week on hopes inflation for April, based on the wholesale price index (WPI), will ease further due to which the Reserve Bank of India (RBI) will cut the repo rate further in the mid-quarter review of the monetary policy on June 17.

The yield on the 10-year benchmark government bond 8.15 per cent 2022 ended at 7.59 per cent on Friday, compared with the previous close of 7.60 per cent. During the day it had touched 7.56 per cent, its lowest since early July 2010.

The Street expects the WPI for April to drop to 5.40 per cent or even below, due to a high base of last year and fall in vegetable prices. WPI inflation for March rose 5.96 per cent, after an annual uptick to 6.84 per cent in February.

"The further fall in WPI for April will result in the yield on the 8.15 per cent 2022 moving down to 7.56 per cent again," said a gilt dealer with a private bank. The dealer also added that the repo rate would drop to seven per cent in the next policy review from the current 7.25 per cent.

The rupee is expected to weaken further from current levels as the strengthening of the dollar against other major currencies is expected to continue this week. The rupee closed at Rs 54.80 per dollar on Friday compared with the previous close of Rs 54.25.

"Foreign flows will continue into India, but strengthening of the US dollar against other major currencies will result in weakening of the rupee. I expect it to trade in the range of Rs 54.60 to Rs 55.00 this week," said Mohan Shenoi, president - group treasury and global markets, Kotak Mahindra Bank.