Mumbai: The benchmark 10-year bond yield ended off a near two-week high on Friday on concerns of tight liquidity and high inflation data next week.
The yield on the 10-year benchmark bond ended at 7.61%, after hitting 7.64%, the highest since 28 May and up eight basis points from Thursday.
The 10-year bond traded in a range of 7.55-7.64% intraday.
Volumes were a heavy Rs119.15 billion ($2.5 billion) compared with Rs95.2 billion on Thursday on the central bank’s trading platform.
Dealers are concerned about an off-cycle interest rate hike by the Reserve Bank of India (RBI) if the May wholesale price inflation comes sharply above expectations.
The 10-year benchmark bond yield touched 7.61% after a media report showed that the headline number could top 10% on high sugarcane prices.
“More than liquidity, bond market is worried on the inflation number. If it is quite high, then there could be an inter-meeting rate hike. Though, I would be surprised if RBI hikes even when the liquidity tightness persists,” said Nirav Dalal, managing director and country head of debt capital markets, YES Bank.
A Reuters poll showed India’s wholesale price index probably rose 9.56% in May from a year earlier.
To add to inflation worries, an outflow of around Rs300 billion toward advance tax payments and about Rs385 billion toward broadband auction payments in the next two weeks may add to the bearish sentiment.
“Next week, I expect liquidity to be in a net negative of Rs800 billion to Rs1 trillion,” Dalal said.
Traders were also hoping that next week’s bond auction would be deferred amid such tight liquidity.
“There might be a bit of pullback on yields if the RBI or government announces any liquidity supporting measure next week. Otherwise, the bond yield trajectory is headed upwards,” Dalal said.
“It may help if the government defers the payment for broadband auction,” he added.
India will earn Rs385.4 billion from selling three all-India licences to six private sector operators.
On Monday, bond yields are expected to rise further as traders are likely to remain jittery ahead of inflation data. The 10-year bond is seen at 7.60-7.70% on Monday, dealers said. The benchmark five-year interest rate swap ended at an over one-month 6.74%, from the previous close of 6.59%. The one-year swap rate ended at a one-and-half-year high of 5.22%, up from 5.14% on Thursday.
In interest rate futures on the National Stock Exchange, the June contract was at 8.0162%, while the September contract was not traded.