Bond yields might fall further; rupee could weaken

Government bond yields are seen falling further this week, on the back of softening retail inflation data. Consumer Price Index (CPI)-based inflation rose 4.38 per cent year-on-year in November, the slowest pace since January 2012.

Though the Reserve Bank of India (RBI) kept the repo rate unchanged at eight per cent earlier this month, the central bank's CPI-based inflation target was revised to six per cent by March 2015. Earlier, the target was to achieve eight per cent by January.

"The 10-year bond yield may drop by another five basis points this week. Banks have been buying bonds and in the recent past, have also made money through profit booking," said the head of treasury of a large state-run bank.

The yield on the 10-year bond ended at 7.83 per cent on Friday compared to the previous close of 7.87 per cent.

The rupee might continue to weaken this week, as dollar demand for defence-related payments and oil importers, dollar demand will weigh on sentiment.

"The rupee may trade in the range of 62.25 to 62.75 a dollar. The bias is towards weakening," said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai.

On Friday, the rupee ended at 62.30, compared with the previous close of 62.35 a dollar.