Bond yields rise with accelerating April month's inflation

14 May 2012 Evaluate

Pre April month’s inflation data scenario:

Bond yields edged lower on account of prevailing caution ahead of April’s month inflation data, which boosted the demand of safe haven bonds, which ultimately weighed on the sentiment for yields. The expectation was that India’s inflation rate probably eased only slightly in April, held firm by food prices, underscoring the RBI's stance that it had little room for further rate cuts. The forecast was that the wholesale price index, India's main inflation gauge, rose 6.70 percent in April versus a year ago. However, dwindling prices of Brent crude also acted as whammy on the bond yields.

On the global front, US Treasury prices gained in Asia on Monday, pressuring yields, as political instability in Greece continued to sap investors' appetite for risk. Meanwhile, Brent crude, continuing to drop for a third straight session, slipped towards $111 on Monday, after talks to form a new government in Greece failed, deepening the euro zone crisis, and cutting fuel demand further. Investors were cautious as a repeat Greek election will be needed if politicians cannot reach a compromise, pushing the debt-laden country closer to bankruptcy and likely driving oil prices southwards

Back home, the yields on 10-year benchmark 8.79% - 2021 bonds edged 2 basis points lower to 8.54% from its previous close of 8.56% on Friday.

The benchmark five-year interest rate swaps were trading down at 7.50% from its previous close of 7.51% on Friday.

The Reserve Bank of India has announced the auction of 91-day and 364-day Government of India Treasury Bills for notified amount of Rs 10,000 crore and Rs 5000 crore respectively. The auction will be conducted on May 16, 2012 using 'Multiple Price Auction' method.

Post April month’s inflation data scenario:

The yields on 10-year benchmark 8.79% - 2021 bonds edged 2 basis points higher to 8.56% in comparison to early deals post the release of inflation figures, as this reduced the expectations for monetary easing at the central bank's policy meeting next month.

Inflation accelerated in April to 7.23 percent as price pressures for food, fuel and manufactured items all picked up, adding to the RBI's struggle to control inflation when economic growth has slumped to a near three-year low. The rise in the wholesale price index (WPI) topped the increase in March's data of 6.89 percent.

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