On Thursday, bond yields eased from intraday peaks on expectations inflation would not surge above 12% this month, but sentiment remained cautious after a rebound in oil prices from 12-week lows.
The 10-year bond yield ended at 9.32%, off an early high of 9.41%, but steady from Wednesday?s close.
It had risen to 9.54% on Tuesday, one basis point short of a seven-year high hit earlier this month, after the central bank tightens policy more than markets had expected.
Volumes were normal at Rs 3,630 crore on the central bank’s trading platform.
After market hours, the government said annual wholesale price inflation was 11.98% as at July 19.
“I expect there could be some support to government bonds (while) inflation remains around 12%,” said Anoop Verma, associate vice president at Development Credit Bank.
“People are sick and tired of selling, selling … They actually want to stick their necks out and buy bonds.”
Traders said a rebound in oil prices kept sentiment cautious. Oil prices, which hit a 12-week low below $121 a barrel earlier this week, traded near $126 on Thursday.
India imports a majority of its oil, and high global prices raise the pressure on the government to increase state-set fuel prices, which impacts inflation.
On Tuesday, the RBI raised its key lending rate by half a percentage point to 9% and increased banks’ cash reserve ratio by 25 basis points also to 9%, effective Aug. 30, to quash inflation.
Meanwhile, the rupee fell half a percent on Thursday as oil refiners stepped up dollar purchases to meet month-end import commitments, with a bounce in oil prices from 12-week lows also hurting sentiment. It ended at 42.57/58 per dollar, off an intraday high of 42.42 and 0.5% weaker than 42.36/37 at the close on Wednesday.
?The rupee weakened mainly because of dollar demand from oil refiners and some position adjustments at month-end,? a senior dealer with a private bank said.
India imports 70% of its oil needs, and the higher prices widen the trade deficit which puts pressure on the rupee.
Dealers said they were also eyeing the share market to gauge foreign fund flows, with outflows this year one of the prime reasons for the rupee’s 7.4% decline against the dollar. The main share index rose 0.5% on Thursday, but is still down 29% this year.
Foreign funds have been net sellers of nearly $7 billion worth of stocks so far in 2008, after having bought a record $17.4 billion last year.
