Mumbai: Indian federal bond yields and overnight indexed swap rates rose to their highest in nearly seven years on Monday, in anticipation of a policy response to calm 13-year-high inflation. At 9:35am, the 10-year benchmark bond yield was at 8.73%, off an early peak of 8.76%, the highest since November 2001. It had ended at 8.63% Friday.
Five-year swap rates jumped about 40 basis points to 9.7%, their highest since May 2001, two dealers said. It had closed at 9.32%-9.42% on Friday.
Finance Secretary D. Subbarao said on Saturday the central bank was expected to take more monetary action to counter rising inflation. The Reserve Bank of India had raised its key lending rate by 25 basis points to 8% percent this month.
Annual wholesale price inflation rate, India’s most widely watched measure, rose to 11.05% in the 12 months to 7 June, its highest since May 1995 and far outstripping forecasts for 9.82%, data released on Friday showed.
“Nine per cent for the 10-year looks a fair call at the moment. But how soon this level is hit will depend on what kind of measures RBI will take and by how much they are willing to raise rates,” a senior fund manager with a private mutual fund said.
Citigroup said it expected the central bank to raise short-term interest rates and the cash reserve ratio (CRR), or the proportion of deposits that banks must set aside.
“We expect rates to be higher by 25-50 basis points with the RBI likely to use a combination of CRR and repo/reverse (repo) hikes,” it said in a research note, adding inflation was likely to remain at elevated levels for the next few months.