The yield on the benchmark bond rose for the fourth straight day after data showed that retail inflation has surged to nearly 7% in March. The inflation print of 6.95% came in at levels way above what were estimated by economists. The benchmark yield ended at 7.2148% on Wednesday, three basis points higher than it ended in the previous trading session on Tuesday. This is the highest level since May 23, 2019.
The movement in the yield was influenced by the bond auctions. The Reserve Bank of India (RBI) devolved some portion of 6.54%-2032 bonds on the primary dealers at the weekly bond auction. The central bank devolved Rs 1,553.203 crore of an amount of Rs 13,000 crore. It set the cut-off price at Rs 95.12 or 7.2446% cut-off yield.
“ The jump in bond yields was due to the adverse inflation shock. CPI inflation at 6.95% was much higher than markets expectation,” said Pankaj Pathak, fund manager – fixed income, Quantum Mutual Fund.
Food price inflation has climbed 7.68% in March while fuel and electricity prices rose 7.52%. The 17-month high inflation was higher than the 6.1% rise in February. Meanwhile, US consumer prices also rose sharply. Analysts expect the higher inflation may prompt the US Fed to hike rates aggressively and the RBI, too, is likely to start rate hikes soon.
The bond yield is already under pressure due to higher government borrowing with a higher amount being front-loaded in the first half of the current fiscal year, higher crude oil prices, and the introduction of liquidity absorption tool by the central bank in the monetary policy. Demand from investors is also weak due to domestic and international uncertainties.
Market participants expect bond yields to rise further in the coming days due to higher fuel prices and expectations of a further rise in inflation. Most dealers expect the benchmark yield to rise to 7.30-35% by the end of this month. “Given the rising fuel prices, CPI inflation is expected to remain elevated near 7% for coming few months. This could force the RBI to undertake a faster rate hike path. Bond yields may continue to move higher,” Pathak added.