Bond yields down

The rise in the inflation rate to 8.17 per cent for the week ended August 20 failed to spook the government securities market.

Bond yields actually continued their downward path. The yield on the benchmark 10-year paper dropped by 10 basis points from 5.99 per cent on Thursday to 5.88 per cent today.

The prices of medium-term papers went up by more than Rs 1.30. The bullishness in the government securities market had a spillover effect on the forward dollar premiums in the foreign exchange market.

Six-month and one-year forward dollars closed at 1.95 per cent and 1.72 per cent today, against 2.15 per cent and 1.86 per cent, respectively, on Thursday.

In the equity markets, too, the inflation blip failed to dent the sentiment. The volume dropped but the Bombay Stock Exchange (BSE) Sensex closed 0.38 per cent (19.74 points) higher at 5218.46.

Blue-chips saw select buying, with 18 out of the 30 scrips in the Sensex basket closing higher. The broader markets were marginally positive and gainers outpaced losers 950:933 on the BSE.

Stock market sources said the 8.17 per cent inflation rate was a temporary blip and inflation come down soon.

"The duty cuts on petroleum products and steel products will start reflecting in the inflation rate soon. So, there is nothing to panic about," a top BSE broker said.

In the government securities market, yields jumped up above 6 per cent immediately after the data was announced but quickly retracted to below-6 per cent levels.

Dealers said banks were buying gilts if only "to prevent the yields from going up". The logic, dealers explained, was that banks had realised that salvation lied in keeping up the buying pressure.

This will keep prices buoyant and therefore yields low. Therefore, the extent of depreciation of value of gilts in their books, goes down and to that extent they will be required to provide for lesser amounts.

Dealers also said following the RBI announcements on Thursday, PSU banks had stopped selling gilts in an aggressive manner.

"The second benefit is that the relaxation had encouraged banks to restart buying government securities as they have the option of a one-time transfer from their SLR portfolio to the held to maturity portfolio."

At the same time, the market is bullish as it expects inflation to be moderate from next week onwards.

Dealers cited several reasons, prominent among which were the moderating effect of the duty cuts announced by the government and the base effect.

Some dealers pointed out that a string of weak data in the US in recent weeks has taken the pressure off US interest rates for the time being.

"At the moment, it doesn't look like the US Fed will be hiking rates rapidly. Therefore the pressure on the RBI will be so much lower," they said.