Gilts tumble, rupee under pressure

The latest inflation numbers sent shock waves through the government bond market.

Gilt prices tumbled and the yield on the 10-year benchmark 7.37 per cent 2014 paper jumped to 6.28 per cent at close yesterday, 15 basis points higher than Thursday's close of 6.13 per cent.

Prices in the long end of the maturity table fell almost Rs 1.50 while medium-term paper prices dropped by Re 1.

The rupee came under pressure even though it closed almost unchanged from yesterday's levels, on the back of dollar selling by the Reserve Bank of India.

The rupee dipped to 46.48/50 in intra-day trading against yesterday's close of Rs 46.3650, but eased because any hike in interest rates "" which is likely to be triggered by the rising inflation rate "" will hurt domestic growth prospects.

Bond dealers said the inflation data would be a cause of worry for the next two or three weeks and the inflation rate may inch close to 8 per cent. However, the job data released in the US after market hours in India was much below expectation.

"This shows that the US recovery is not robust yet and may act as a positive trigger for the Indian market," said a bond dealer. The US Federal Open Market Committee is meeting on Tuesday to take a call on yet another round of interest rate hikes.

"The inflation figure was a surprise for the market. It is expected to go up further. In this scenario, trade will remain light as the market will be susceptible to various events next week," said Surendra Rosha, head of sales, HSBC Bank.

Partha Mukherjee, head of treasury at UTI Bank, said the market conditions were too fluid and it would be extremely difficult to chart out a course at this point.

The Bank of England hiked its base rates by 25 basis points yesterday but the market did not react to the hike as it had already been discounted.

The market is also expecting that the government will hold on to the existing interest rate of 9.5 per cent when the Employees Provident Fund trustees meet on Monday, given the present inflation figure, which has made real interest rates negative.