The yield on the 10-year benchmark government bond 7.80 per cent is expected to harden on concerns that the fuel price rise will impair the central bank’s efforts to control inflation, thereby leading to further policy rate rises.
Market participants fear the recent fuel price rise may push the inflation rate to double-digits in the coming months. “The price rise may push the overall inflation rate by 90-100 basis points, including direct impact in the first round and indirect impact in the second round,” said Sujan Hajra, chief economist, Anand Rathi.
On friday, the government raised prices of diesel, liquefied petroleum gas and kerosene by 9-20 per cent. The power prices have the highest weightage in the primary articles group of the Wholesale Price Index (WPI). In May, WPI was at 9.06 per cent, up from 8.66 per cent in April 2011. According to the borrowing calendar, RBI is scheduled to auction Rs 15,000 crore worth of four dated securities this week. This will also contribute to the hardening of yields, as traders will cut positions to accommodate larger supply.
The yield on the 10-year benchmark 7.8 per cent government bondclosed on Friday at 8.24 per cent, after trading in the range of 8.19-8.27 per cent last week.
