The benchmark yield closed at a 16-month high of 7.17% on Monday, with traders consolidating their positions ahead of the release of the consumer price index (CPI) inflation data on Tuesday.
The benchmark yield closed at a 16-month high of 7.17% on Monday, with traders consolidating their positions ahead of the release of the consumer price index (CPI) inflation data on Tuesday. The 10-year yield closed eight basis points (bps) higher on Monday compared with Friday’s closing level — recording the highest single-day surge since September. Expectation of a rise in the CPI inflation in November and uncertainty over the fiscal deficit have kept yields high over the last few weeks, bond dealers said. In its fifth bimonthly monetary policy, the Reserve Bank of India (RBI) indicated that moderation in inflation, excluding food and fuel, observed in the first quarter of this fiscal has reversed and there is a risk that this upward trajectory may continue in the near-term. RBI also said the impact of house rent allowance (HRA) by the Central government is expected to peak in December and the rise in international crude oil prices is likely to sustain.
Brent crude has consistently remained above the $60-mark since the end of October, with OPEC extending its production cuts till the end of next year. A rise in demand for oil, especially from China, is expected to keep prices firm, at least in the near term.
According to a Bank of America Merrill Lynch report, inflation is likely to rise to 4.5% in November on the temporary onion and tomato price spike. “It will likely settle around 4.7% in 2018, well within RBI’s 2-6% mandate, as vegetable prices normalise,” the report indicated.
The last time the CPI inflation crossed the 4% mark was in October 2016. It had bottomed-out at 1.46% in June this year. Since then, CPI inflation has risen continuously every month. It stood at 3.58% in October this year.
Bond dealers also attribute the surge in yield to the triggering of stop losses between the 7.10-7.12% levels. The yield shot up to as high as 7.176% during the day before it closed at almost the same levels, indicating persisting weakness in the market.
Badrish Kulhalli, head – fixed income at HDFC Standard Life Insurance Company, indicated that concern over inflationary pressures is the deciding factor for yield movement under the present circumstances.
“The market is expecting inflation to remain above the 4% mark for November. A lack of clarity on the fiscal deficit front has also been a major cause of concern, even as the market is waiting for November GST collections for some sort of guidance,” he said.
The US Fed is also expected to hike its Fed funds rate later this week. Although this factor has not taken precedence over inflation and fiscal deficit, it might still have an impact on the yields in the short term, dealers said.