10-year bond yield nears 7% after inflation quickens

Mumbai: The 10-year bond yield was near 7% on Tuesday to hit a 14-month high after retail inflation quickened more than estimated, reducing expectation of a rate cut any time soon by the Reserve Bank of India (RBI).

The 10-year bond yield was at 6.991%, a level last seen on 8 September 2016, compared to its previous close of 6.972%. Bond yields and prices move in opposite directions.

Consumer inflation rose 3.58% in October from a year ago, up from 3.28% in September. Bloomberg analysts’ estimated Consumer Price Index-based inflation at 3.43%.

“The likelihood of inflation testing the 4% target by late 2017 and staying above it for rest of FY18 reinforces our expectations that the Reserve Bank of India will remain on hold in December and the rest of FY18. Other pipeline risks—oil prices, GST tweaks raising risks of a miss in fiscal targets, and policy normalisation by global central banks—are likely to nudge the policy committee to keep a neutral rather than an accommodative policy stance,” said Radhika Rao, economist, DBS Group Research.

Foreign investors also turned net sellers of Indian debt on this expectations. In last six trading sessions, they sold nearly $465 million in debt markets. So far this year, Foreign institutional investors bought $22.39 billion.

The recent announcement of another open market operation debt sale on 23 November of Rs10,000 crore also heightened the supply concerns and that’s weighing on the bond market at a time when there seems to be no relief on the inflation front, Bloomberg reported.

Traders are now focusing on the wholesale price inflation data due after 12.30pm on Tuesday. A Reuters poll predicts wholesale price inflation to rise 3.01% in October from a year ago, compared to 2.60% rise in September.

The increased probability of a hike in interest rates by the US Federal Reserve during its December meeting may add to the negative sentiment around emerging markets debt.

The selling in the debt markets has also hit the rupee, which has fallen since the beginning of November and is down 1%. So far this year, the rupee has gained 3.8%.

Rupee opened marginally higher against the US dollar. The rupee opened at 65.36 a dollar. At 9.15am, the home currency was trading at 65.30 against the dollar, up 0.20% from its Monday’s close of 65.43.

The benchmark Sensex index fell 0.13%, or 43.53 points, to 32,990.03 points. So far this year, it has gained 25%.