The yield on government bonds hardened for the fifth day in a row on tight liquidity and the prospects of the Reserve Bank of India raising policy rates to curb inflation.
The speculation that RBI may issue fresh 10-year benchmark paper to replace the existing 7.80 per cent bond maturing in 2020 also pushed up the yield.
The benchmark 10-year paper at close of trade went up by three basis points to 8.01 per cent, according to Negotiated Dealing System (NDS) data.
The rate touched 8.05 per cent in intra-day trading, the highest level since May 3.
Dealers said though inflation had eased a beat, the central bank might raise borrowing costs again to combat inflation. The wholesale price inflation has stayed near 10 per cent since February.
The benchmark wholesale-price index advanced 9.97 per cent in July from a year earlier, after a 10.55 per cent gain in June, the commerce ministry said on August 16. Inflation continues to be a concern, and more rate hikes may be in store, according to a bond dealer with a private sector bank.
RBI, which has increased benchmark interest rates four times this year, will review its policy next on September 16.
A senior treasury official with a public sector bond said the market sentiment was partly influenced by a report about new 10-year benchmark security is being issued in the upcoming auctions.
Rupee advances
The rupee rose on speculation overseas funds would buy the nation’s assets to benefit from growth in Asia’s third-largest economy.
Overseas funds bought Rs 10,680 crore ($2.3 billion) in equities this month, raising total investments in stocks this year to Rs 58,370 crore, according to the nation’s market regulator. Prime Minister Manmohan Singh’s government aims to spur growth to 8.5 per cent in the financial year ending March 31, from 7.4 per cent in the previous year.
“The bias is in favour of the rupee and that is being driven by fundamental factors,” said Naveen Raghuvanshi, a currency trader at Development Credit Bank.
The local currency appreciated 0.1 per cent to 46.65 per dollar as of the 5:00 pm close in Mumbai. The currency may advance to as strong as 46.5 this week, Raghuvanshi said.
The rupee would gain 2.5 per cent against the US dollar to 45.50 by the end of December, according to the median estimate of forecasts by 21 economists in a Bloomberg News survey.
Offshore forwards indicated the Indian currency will trade at 47.26 to the dollar in three months, compared with expectations of 47.34 at the end of last week. Forwards are agreements to buy or sell assets at a set price and date. Non- deliverable contracts are settled in dollars.
