MUMBAI: Indian federal bond yields were up on Wednesday amid caution ahead of food price inflation data, the $3.3 billion auction, and expectations of an imminent fuel price increase.
The yield on the 10-year benchmark bond ended at the day's high of 7.60 per cent, three basis point above Tuesday's close. It traded in a narrow range of 7.55-7.60 per cent. Volumes were a modest 79.4 billion rupees ($1.7 billion), compared with Tuesday's 119.25 billion rupees, on the central bank's trading platform.
"Inflation is the most important data that people have in their minds now. And to add to it, there is the fuel price meeting on auction day," said Srinivasa Raghavan, head of treasury, IDBI Gilts. The government will auction 50 billion rupees each of 7.17 per cent bonds maturing in 2015 and 7.80 per cent 2020 bonds, 20 billion rupees of 8.26 per cent 2027 bonds and 30 billion rupees of the 8.28 per cent 2032 bonds on Friday.
Dealers expect market mood to be cautious ahead of the auction as despite the strong expectations of liquidity improving next month, there are no visible signs to support such optimism. "I expect the cut-offs to be 3-5 basis point higher than the market levels," Raghavan said. Banks borrowed 701.75 billion rupees from the central bank's repo window compared with 651.25 billion rupees on Tuesday. "System can absorb a liquidity deficit of up to 80,000 crore (800 billion rupees) as there is excess SLR (statutory liquidity ratio)," said Hitendra Dave, head of global markets, HSBC, in Mumbai.
On Thursday, bond yields are likely to take opening cues from the overnight movement of US Treasuries, which will in turn closely eye the US Federal Reserve's statement. However, during the rest of the day, bond yields are likely to move with an upside bias as dealers prefer to offload stocks ahead of the bond sale. The Federal Open Market Committee ends a two-day meeting on Wednesday and releases its statement on interest rate policy at 1815 GMT. The US central bank is expected to restate its intention to keep interest rates near zero for "an extended period," but there is speculation that it will sound less upbeat about the economy.
India's food price inflation data will also be closely eyed for cues on interest rate moves by the central bank here. "We expect food price inflation to keep drifting down. This is an important component of overall WPI (wholesale price inflation) scene," said a foreign bank dealer. India's food price index rose 16.12 per cent in the year to June 5, but lower than the previous week's annual reading of 16.74 per cent.
Also, concerns of a fuel price hike will continue to loom this week. A panel of ministers will meet on Friday to decide on fuel prices, sparking worries that higher oil prices will stoke inflation. The benchmark 10-year bond yield is expected to move in the 7.56-7.63 per cent range on Thursday, dealers said. The one-year Overnight Indexed Swap (OIS) rate ended at 5.47 per cent, up from its previous close of 5.43 per cent. The five-year swap closed at 6.78 per cent, almost unchanged from Tuesday's close of 6.79 per cent. In interest rate futures on the National Stock Exchange, the June contract ended at 7.7345 per cent, while the September contract was not traded.
