With inflation soaring up to touch a three-year high of 7%, way above the Reserve Bank of India (RBI)?s comfort level of 5%, bond prices are likely to crash further, say money market players. On Friday, the 10-year benchmark 7.99%, 2017 paper shot up seven months high to end at 7.98%, up 10 basis points, as against 7.88% on Thursday.
The most-traded 7.99% 2017 paper has slipped below its par value intraday as bond traders have persistently sold on the view that high inflation would force RBI to hike the cash reserve ratio (CRR) or any of the key rates, or even increase the ceiling on market stabilization scheme (MSS) in order to curb excess liquidity.
Wholesale price index (WPI) for the week ended March 22 rose to 7% as against 6.88%, the week earlier.
Going forward, market players are very bearish on the bond market.
Manoj Swain, head of fixed income at Standard Chartered Bank is of the view that the 10-year benchmark paper may touch 8.25% in the next 2-3 months from now, given that inflationary pressures persist.
?For the short term, the central bank may announce an increase in MSS auctions or else opt for a hike in CRR. In all ways, the upcoming monetary policy is likely to be very tight,? said Swain.
However, the government borrowing program for Rs 20,000 crore in April may also help in doing away with additional liquidity.
