Money markets have entered a state of flux. On Friday, the ten-year benchmark paper climbed 17 basis points to touch an intra-day high of 8.64%. It finally closed at 8.63%, against Thursday?s close of 8.47%. Market participants now fear that the central bank will take further measures to curb high inflation.
Almost on cue, HDFC Bank raised its benchmark prime-lending rate by 25 basis points, while other banks have said they would be reviewing rates soon. ?The bond market looks very bearish. We expect this scenario to continue for the next five to six months as inflation will continue to soar,? said RVS Shridhar, chief dealer with Axis Bank. ?Inflation today is completely supply-side driven and we expect the central bank to take monetary action in order to control this excess inflation,? he added.
Traders said volumes on money markets have fallen significantly. ?There is hardly any trading on swaps, bonds or forwards. The bond market is the worst to be affected of the lot,? a private bank dealer said. Total volumes on the bond market were relatively thin at Rs 2,495 crore on Friday, with the ten-year bond being the most heavily traded. On Thursday, volumes were around Rs 3,500 crore.
Market participants had expected a double-digit inflation number to be released for the week of June 7, given the 10% fuel price hike, but they were stunned to see it cross 11%. Robert Prior-Wandesforde, senior Asian economist with HSBC, expects inflation to remain in double digits for at least nine months, barring a sudden collapse in commodity prices. ?There will be more monetary and fiscal measures taken by the government. The risks to this are now on the upside and we certainly wouldn?t rule out the possibility of another intra-meeting rate increase,? he said.
?Going forward, we expect inflation to continue to trend higher, though not at the same rate, as the fuel (price) adjustment was a one-time move. However, continued double-digit inflation is expected to have a huge psychological impact on consumers, further fuelling inflationary expectations. Due to the social implications, we believe it will increasingly become a major political issue,? said Tushar Pandit, economist at Goldman Sachs.
Meanwhile, the call money market ended at 4.25-4.50%, sharply down from 8.00-8.05% from Thursday?s close as demand waned sharply on reserves reporting day.
On the rupee front, the market expects continued depreciation of the currency against the dollar. ?With inflation soaring so high, the rupee is under severe pressure. There is heavy selling by FIIs too, which is weakening the rupee further. We expect the rupee to touch 43.20 against the dollar in a week?s time,? Shridhar said. On Friday, the rupee ended at 42.93/94, off a low of 42.99, against Thursday?s close of 42.97/98.
?Given the negative sentiments of high inflation hurting foreign inflows and elevated global oil prices, we expect the rupee to weaken. Our 3-, 6- and 12-month $/INR forecasts remain at 43.9, 44.1 and 42.2, respectively,?? said Pandit.