Bond yields have begun correcting themselves to the headline inflation rates. Ten-year benchmark paper has gained seven basis points over the last three days to a nine-month high of 8.05% on Friday. The paper finally closed at 8.03% but the pressure on yields is upward, dealers said.
Analysts believe that with persistent inflationary pressures, the bond market has turned bearish. ?Inflationary pressures coupled with ample supplies of government paper are exerting an upward pressure on yields,? said Manoj Swain, head of fixed income at Standard Chartered Bank.
Bank dealers expect the Reserve Bank of India to hike the cash reserve ratio by 25-50 bps when it announces the annual review policy on April 29.
A few are also expecting an increase in the ceiling on the market stabilisation scheme (MSS) auctions to mop up excess liquidity from the system.
Volumes in the bond markets have dropped, since dealers expect inflation to rise further. ?In January, when inflation was at 6%, bond yields were under control. During this period, about Rs 15,000 crore used to be traded in the bond market. However, today, just about Rs 4,000-5, 000 crore, because of inflationary pressures,? said Swain.
According to Clearing Corporation of India (CCIL), average daily volumes in March have slipped to Rs 5,400 crore against Rs 13,000 crore in January and Rs 9,150 crore in February.
In fact, in January 2008, there were expectations of a softening trend in interest rates.
But the scenario has vastly changed today. ?Between end-March and today, the 10-year benchmark paper has gone up by at least 30 basis points. Market participants are postponing their buying requirements. Also, they have persistently sold on the expectation that the interest rate will go up,? said Golak C Nath, vice president and economic advisor at CCIL.