Mumbai: Indian federal bond yields eased on Tuesday, 10 June, from one-year highs as state-run banks scooped up bargains, but spiralling inflation and tightening of cash conditions are expected to keep the sentiment subdued.
At 10:15am, the 10-year bond yield was at 8.26%, two basis points lower from Monday’s close.
In early trade, it touched 8.29% but below 8.31% hit in the previous session, which was its highest since mid-June 2007.
Dealers said the current yield was attractive for investment. Bond yields have risen about 30 basis points since the last policy review on 29 April, when the central bank raised its reserve requirement but kept its key rates unchanged.
“There is definitely some value buying at current levels as dealers are adding to their portfolio at every dip,” a dealer with a state-run bank said.
“But negatives such as inflation and liquidity will continue to exert pressure,” he said.
Annual inflation hit a three-and-a-half-year high of 8.24% on 24 May, and analysts expect data later this month to show it rose to 13-year highs above 9% early June as last week’s increase in state-set fuel prices works through the economy.
Dealers said a spike in oil prices and an increase in fuel prices last week are expected to add to inflationary pressures, which could force the central bank to raise rates.
“With oil now close to $140 a barrel, we now see more than 50% probability of an inter-meeting rate hike of 25 basis points,” Morgan Stanley said in a research note.
The Reserve Bank’s reviews its policy on 29 July. It has kept its key lending rate unchanged at 7.75% since March 2007.
“We believe RBI will raise rates with an objective of checking volatility in exchange rate and reducing domestic demand as well as non-oil import growth,” Morgan Stanley said.
Dealers said payment of advance tax by companies by the weekend is expected to squeeze cash conditions and push bond yields higher.