Bond yields rose to their highest in more than a month on Wednesday as analysts forecast inflation would top 9% after the government raised state-set retail fuel prices by about 10%. The 10-year bond yield ended at 8.14%, having risen as high as 8.16%, its highest since late April. It had closed on Tuesday at 8.12%. Volumes were low at Rs 1,880 crore. India announced its biggest increase in petrol and diesel prices in 12 years on Wednesday to curb losses at its state-owned refiners, a move which will increase inflation and triggered a political backlash. Economists expect the fuel price rises to lift annual inflation to a 13-year high of 9.2% on June 7.
“There will be a fall in bond prices. It (fuel price increase) was much more than anticipated. Nobody had thought LPG will be hiked,” Piyush Wadhwa, senior vice president at ICICI Securities Primary Dealership said. The central bank will auction federal bonds worth Rs 10,000 crore on Friday, after selling Rs 4,000 crore of treasury bills on Wednesday. Meanwhile, the rupee fell on Wednesday as the stock market dropped 2.8% to a two-month closing low, heightening worries foreigners would continue to withdraw funds, with broad gains in the U.S dollar also weighing. Rupee ended at 42.77/78 per dollar, 0.4% weaker than Tuesday’s close of 42.60/61 and down nearly 8% this year.”The rupee is down tracking the stock market mainly,” said L Subramanian, chief dealer at ICICI Bank. The stock market fell sharply after a rise in state-set fuel prices triggered concerns of accelerated inflation and a squeeze on corporate earnings growth. The stock market has fallen 23.5% this year, with foreigners being net sellers of $4.3 billion of stocks in 2008, including a net $1.5 billion in the 10 sessions to Tuesday.
In 2007, foreigners bought a record $17.4 billion worth shares, helping the rupee rise more 12%. Dealers said dollar demand from oil companies was low. Refiners are waiting for full details on the central bank’s decision last week to provide foreign exchange to oil firms, which analysts say would reduce demand for dollars and support the rupee. Oil is India’s biggest import, and refiners are the major buyers of dollars in the market. On Wednesday, oil was trading around $124 a barrel, about $11 a barrel below a record high hit last month.
