Mumbai: The federal bond yields raced to near seven-year highs after the central bank tightened policy aggressively to curb inflation pressures.
Traders said further price movements would depend on weekly inflation data on 27 June.
After market hours on 24 June, the central bank raised its key lending rate by 50 basis points to 8.5% with immediate effect, its highest since March 2002 and the second hike this month.
It also raised cash reserve ratio, the proportion of deposits banks must keep with the central bank, to 8.75% from 8.25% in two 25-basis-point stages on July 5 and July 19.
The moves followed a spike in the annual inflation rate to a 13-year high in early June above 11%.
At 10:13 am, the 10-year benchmark bond yield was at 8.79% after hitting 8.86% in opening deals, a level it last tested in end-October 2001.
“For today, yields should hold around current levels and more moves will depend on the incoming inflation data, which should help form a view on the July review,” said Piyush Wadhwa, senior vice-president at ICICI Securities.
At its high, the yield had risen 29 basis points from Tuesday’s close of 8.57%. Total volume was a thin Rs2.25 billion ($52 million) on the central bank’s electronic trading platform with only two bonds being traded.
The swap market saw a sharp selloff, driving the five-year swap rate to 10%, 50 basis points above 24 June’s close. Traders said this may push bond yields higher.
“We should see 9.10-9.20% on the 10-year yields in the near term,” said Suresh Pai, chief dealer at Canara Bank.