Subdued gilt yield rise likely

Government bond yields are unlikely to rise sharply although inflation is expected to top 5 per cent "� Reserve Bank of India's apparent comfort level "� later this month on account of fuel price hikes announced Monday.

Gilt dealers could draw comfort that uncertainty over the hikes has ended and that the size of hikes was more-or-less expected.

On Tuesday, gilt yields were likely to open higher in a knee-jerk reaction to the petrol and diesel price hikes, but near-term factors such as the scheduled auctions could weigh more on the market, dealers said.

"Initially, gilt prices may fall, but bonds will recover as market has already factored in the oil price hike and also a rate hike by the RBI in the July policy review," said Securities Trading Corporation of India's Chairman D Basu.

The RBI had left rates unchanged at its monetary and credit policy for 2006-07 (April-March). After much dilly-dallying, the government announced a Rs 4 per litre hike in the prices of petrol and a Rs 2 per litre hike for diesel.

The oil price hike is the first one since September and is aimed at bridging the gap between domestic and global prices.

Customs duty on petrol and diesel have also been reduced to 7.5 per cent from 10 per cent, while oil bonds worth Rs 28,000 crore will be issued to oil companies.

"It is definitely bearish in terms of inflation. We see inflation rising slightly over 5 per cent in two weeks from now," said Shubhada Rao, chief economist at YES Bank.

"As expected, there is a mix of fiscal as well as monetary measures. The duty cuts are expected to have a fiscal bearing as customs revenue would be below the budgeted number," she said.

More than the oil price hikes, gilt traders will be more focussed on the auctions on Tuesday and upcoming Federal Open Market Committee Meeting.

The RBI is due to auction Rs 6,000 crore of 9.39 per cent, 2011 bond and Rs 4,000 crore of a new 30-year bond.

Most dealers are eyeing the FOMC meeting on June 29 amidst growing hopes the US central bank will give definitive hints that it will end its interest rate-raising spree.