Lower June inflation number sends bond yields lower; fuels rate cut pressure

16 Jul 2012 Evaluate

Pre WPI Scenario:

Bond yields were treading water ahead of the June month’s WPI data scheduled to be released later in the day which will provide further cues for the likely central bank stance at its Mid-quarterly policy review on July 31. Industry’s connoisseur expected June inflation to come at 7.61%, up from 7.5% in May.

On the global front, US government debt prices fell on Friday as news of a surprise rise in producer prices, which led to a rebound in Wall Street stocks reduced the safe-haven appeal of bonds, although benchmark yields remained near historic lows. Meanwhile, Brent crude held steady above $102 per barrel on Monday on optimism over the outlook for demand growth as China's Premier Wen Jiabao said the government would step up efforts to boost the economy of the world's second-largest oil consumer.

Back home, the yields on 10-year benchmark 8.79% - 2021 were trading flat at its previous close of 8.10%.

The benchmark five-year interest rate was trading 1 basis point higher at 6.98% from its previous close of 6.97%.

Post WPI scenario:

Offering some relief to Reserve Bank of India (RBI), the wholesale price index (WPI), India's main inflation gauge, slowed to its lowest level in five months at 7.25 percent for the month of June, as compared to 7.55% (Provisional) for the previous month and 9.51 percent during the corresponding month of the previous year. The much awaited figure, was also way below than the consensus estimates of 7.60 percent. Meanwhile, build up inflation in the financial year so far was reported at 1.99 percent as compared to a build-up of 2.41 percent in the corresponding period of the previous year. However, April month’s inflation figure was revised sharply higher from 7.23 percent to 7.50 percent.

The yields on 10-year benchmark 8.79% - 2021 edged lower by 8 basis points to 8.02% from its previous close of 8.10% on Friday, after June wholesale price inflation coming below expectations, underpinned hopes that the central bank will consider cutting interest rates at its July 31 Mid-quarterly policy review.

The benchmark five-year interest rates also dipped 10 basis points lower at 6.88% from its previous close of 7.88% on Friday.

The Reserve Bank of India has announced the auction of 91-day and 182-day Government of India Treasury Bills for notified amount of Rs 7,000 crore and Rs 5000 crore respectively. The auction will be conducted on July 18, 2012 using 'Multiple Price Auction' method.

Additionally, thirteen State Governments announce Auction of State Government Stocks (Securities) for Rs 10,280.00 crore on July 17, 2012.

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