A benign interest rates environment and the Reserve Bank of India buying back government bonds improved investor sentiments in September, thereby pushing bond prices higher. During the month, the yield on the 10-year 6.9% government bond maturing in 2019 declined to 7.19% compared with 7.41% in the previous month. The slow pace of government borrowing also benefited bond prices. The government has scheduled borrowing of Rs1.23 trillion during the October-March period.

Also See Graphics

The central bank bought Rs6,000 crore worth of government bonds, thereby putting more money into the banking system. The ample liquidity, which stood around Rs1.5 trillion, during the month also helped bond prices. The overnight call rate declined to 3.20-3.25%, driven by surplus liquidity in the banking system.

In contrast, the rising inflation, as measured by the Wholesale Price Index (WPI), caused some concern. The annual WPI inflation increased to 0.37% for the week ended 24 September, from -0.95% for the week ended 26 August, driven by a surge in food and crude oil prices. Rising inflation continued to be a concern during the last few weeks as a weak monsoon had raised fears of a drought. The below-normal monsoon is likely to result in lower crop output, which could push food prices higher still.

Graphics by Yogesh Kumar / Mint