Flat inflation lifts yields, Centre plays it down

A flat inflation rate of 6.12% aggravated the weakness in government securities.

Bonds had crashed on Thursday following the base rate hike by Bank of England by 25 basis points. While the ten-year benchmark 7.37 per cent 2014 ended at 5.19 per cent on Thursday, it went up to close at 5.22-23 per cent yesterday.

Meantime, in a mitigation move, the government said India's inflation is likely to ease in the coming weeks and posed no risks to interest rates, a senior finance ministry official said yesterday.

"I see no threat to interest rates from inflation," said Ashok Lahiri, chief economic advisor to the government. "I expect inflation to come down to 4.0-4.5 per cent by March-end."

"This is primarily due to the base effect, kharif crops and recent duty cuts which are likely to bring down input costs."

On the other hand, as against the earlier decision of the government to cancel the auction slated to be held in the first week of February, the Reserve Bank of India postponed the proposed auction which will now be held between February 23-27.

Moreover, 18 states will now rasie Rs 4300 crore in the third week of February through tap sale under additional market borrowing as also for prepayment of high cost debt to the government of India under the debt swap programme.

In response to the inflation rate announced on Friday, prices of the gilts across maturities again fell by 15-35 paise and selling pressure coming from all sections.