MUMBAI: Spiralling prices at the close of the financial year have turned out to be bad news for bond markets. Reacting sharply to the annual inflation figure rising to 6.68% levels, prices of government bonds dipped to three-month lows.
The yield on the benchmark paper, the 7.99% bond maturing in 2017, rose to 7.89% during the day. The yield ended the day at 7.91%, well above Thursday’s 7.78% close, and its highest close since November 30, 2007.
Going forward, yields are expected to breach the 8% mark in the near term given the finance minister indicated that RBI would take measures to curb inflation. This has triggered widespread speculation about a possible hike in the cash reserve ratio (CRR). Yields could also come under pressure in April once the government borrowing programme kicks in.
RBI deputy governor Rakesh Mohan told mediapersons in Ahmedabad the central bank aims to contain inflation at 5%. The statements of the finance minister coupled with the response of RBI deputy governor has led to expectations that RBI may announce tightening of measures ahead of its monetary policy scheduled for April-end.
Standard Chartered Bank head (fixed income trading) Manoj Swain said, “Inflation has zoomed past well ahead of bond traders’ estimates. It is certainly way out of RBI’s comfort zone. This would surely make a case for tightening the monetary stance of the central bank. The rising price levels would prompt RBI to keep cash conditions on a leash till the annual policy review is announced on April 29.”
Volumes in the government bond market were seen dwindling for the past week as traders were wary of a rate action from RBI. The banking system is also reeling under the impact of a severe cash crunch. On Friday, banks borrowed Rs 20,000 crore from the central bank at the daily repo window.
ICICI Bank chief economist Samiran Chakraborty said, “Rising price levels is not an India-specific phenomenon. It has been a global trend, which calls for policy action on the fiscal and trade front in India. The task before the central bank is to prevent the rising price levels from raising inflationary expectations through its monetary policy action.”
In its latest report on market outlook, JP Morgan has forecast the central bank is likely to favour tightening money market liquidity over a rate hike and outsized currency appreciation. Similarly, Goldman Sachs, in its weekly report, brushed aside all hopes of a rate cut.
“The spike in inflation removes nearly all possibilities of a rate cut and, indeed, has increased the probability of a rate hike. However, we think RBI will not hike rates in its next meeting on April 29 as demand is slowing, credit growth moderating and the run-up in inflation is more supply side- and global commodity-driven,” the report added.
The yield on the benchmark paper, the 7.99% bond maturing in 2017, rose to 7.89% during the day. The yield ended the day at 7.91%, well above Thursday’s 7.78% close, and its highest close since November 30, 2007.
Going forward, yields are expected to breach the 8% mark in the near term given the finance minister indicated that RBI would take measures to curb inflation. This has triggered widespread speculation about a possible hike in the cash reserve ratio (CRR). Yields could also come under pressure in April once the government borrowing programme kicks in.
RBI deputy governor Rakesh Mohan told mediapersons in Ahmedabad the central bank aims to contain inflation at 5%. The statements of the finance minister coupled with the response of RBI deputy governor has led to expectations that RBI may announce tightening of measures ahead of its monetary policy scheduled for April-end.
Standard Chartered Bank head (fixed income trading) Manoj Swain said, “Inflation has zoomed past well ahead of bond traders’ estimates. It is certainly way out of RBI’s comfort zone. This would surely make a case for tightening the monetary stance of the central bank. The rising price levels would prompt RBI to keep cash conditions on a leash till the annual policy review is announced on April 29.”
Volumes in the government bond market were seen dwindling for the past week as traders were wary of a rate action from RBI. The banking system is also reeling under the impact of a severe cash crunch. On Friday, banks borrowed Rs 20,000 crore from the central bank at the daily repo window.
ICICI Bank chief economist Samiran Chakraborty said, “Rising price levels is not an India-specific phenomenon. It has been a global trend, which calls for policy action on the fiscal and trade front in India. The task before the central bank is to prevent the rising price levels from raising inflationary expectations through its monetary policy action.”
In its latest report on market outlook, JP Morgan has forecast the central bank is likely to favour tightening money market liquidity over a rate hike and outsized currency appreciation. Similarly, Goldman Sachs, in its weekly report, brushed aside all hopes of a rate cut.
“The spike in inflation removes nearly all possibilities of a rate cut and, indeed, has increased the probability of a rate hike. However, we think RBI will not hike rates in its next meeting on April 29 as demand is slowing, credit growth moderating and the run-up in inflation is more supply side- and global commodity-driven,” the report added.
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