Mumbai: The federal bond yields rose on Thursday after two days of falls as the central bank highlighted the risk of rising inflation and the need to manage the timing and pace of an exit from an easy monetary policy stance.
A deficient monsoon may affect the inflation outlook more than growth prospects, the central bank said, adding that prolonged expansionary fiscal and monetary policies threatened to push up prices and eventually crimp growth.
“The market feels that the rising inflation could cause the central bank to withdraw liquidity sooner than expected,” Anindya Das Gupta, head of treasury at Barclays Capital.
The 10-year benchmark bond yield ended at the day’s high of 7.29%, above Wednesday’s closing of 7.13%.
The yield had risen to a nine-month high of 7.38% on Monday, before falling as low as 7% on Wednesday as the central bank announced an out-of-turn bond buyback for Thursday.
Volumes were a high Rs59.2 billion ($1.2 billion) on the central bank’s trading platform.
Data on Wednesday showed that food prices surged an annual 13.3% in mid-August even as the overall wholesale price index fell.
Sentiment was also hurt after the Reserve Bank of India (RBI) bought only Rs26.57 billion of bonds at an auction where it had offered to buy up to Rs60 billion.
“The buyback results were disappointing in terms of the amount absorbed, but very clearly the RBI has pegged the cut-off to market levels. Now it is important to see if the RBI will stabilize the market by secondary market purchases,” Das Gupta said.
“Tomorrow’s auction will be a bit subdued because sufficient replacement demand has not been created.”
The government is due to sell Rs120 billion of bonds on Friday, part of the Rs2.99 trillion it plans to sell in the April-September period.
The benchmark five-year interest rate swap ended at 6.37/42% from a previous close of 6.35/39%.