The December CPI inflation, which was released after bond market closing hours, shot up to 7.35% — the highest in over five years
The benchmark yield closed at a three-week high of 6.598% on Monday ahead of the release of the consumer price index (CPI) inflation data.
Dealers pointed out that higher CPI inflation expectations, coupled with a lack of OMO announcements, are driving the yields higher.
The December CPI inflation, which was released after bond market closing hours, shot up to 7.35% — the highest in almost five-and-a-half years. In November, the CPI inflation had stood at 5.54%. Though the market was expecting a higher CPI number in December, the broader consensus that stood at 6.8% was way below the number announced on Monday.
Independent market expert Gopikrishnan MS said the bond market cannot expect anything positive going ahead. “I think now that the December CPI has come out, forget rate cuts, there may even be talks of potential rate hikes. The only solace is that core inflation is still under control. But yields will definitely shoot up. We are running into the February Budget and the fear would be whether the fiscal deficit would be under control and how much of extra supply of government securities will hit the market. The benchmark yield will go up to 7% in some time,” he said.
Bank of America’s India country treasurer Jayesh Mehta told a television channel that the CPI number is quite shocking. “We are definitely seeing some hardening of yields. People were expecting (the CPI number) at 6.50-6.75%. People would think that if the yields come higher tomorrow (on Tuesday), that would be a buying opportunity. But with 7.35% print, I don’t think anybody will look to buy. So, we would be seeing some dramatic uptick in yields. Now, we have the budget before the policy, we don’t know the fiscal number side, how is the RBI going to support the bond market, that is going to be a big question mark,” he said.
At the same time, dealers are pointing out that the lack of announcements regarding the OMOs has also dampened the spirits that has contributed to some bit of hardening in the yields.
The Reserve Bank of India announced three OMOs as part of Operation Twist so far since mid-December, where it simultaneously purchased and sold government securities. The central bank has purchased Rs 30,000 crore of government securities so far as part of the OMOs. However, last week, RBI did not announce any OMOs.
PNB Gilts senior executive vice-president Vijay Sharma said the rate cuts may be over for now. “What is hurting the yields is a combination of high CPI expectations and the fact that no Operation Twist has been announced over the last few days. The only solace for traders would be if the central bank announces the OMOs, at least on a fortnightly basis if not on a weekly basis,” he said.