The government bonds weakened reversing a week’s gain and yields rose after some traders pared expectations of cut in policy rates next week due to a higher-than-expected inflation data for May. The wholesale price index-based inflation rose to 7.55% from 7.23% in April on the back of rise in food and fuel prices. The provisional headline number for March was revised upwards by a sharp 80 basis points to 7.69%.
?The distress is from the sharp revision of the March number and the headline inflation has also risen more than expected. Since the market was sitting long, people have offloaded bonds after inflation,? said a bond trader with a foreign bank.
The current benchmark 10-year, 8.79%, 2021 bond, ended 4 basis points higher at 8.33% while the new 10-year 8.15%, 2022 paper, ended at 8.04% after dipping below 8% before the release of inflation data. However, market participants took comfort from the fact that core inflation, the key inflation component that the Reserve Bank of India tracks, has not risen sharply.
The RBI will detail its mid-quarter monetary policy review on June 18 and dealers said the central bank could cut its repo rate by 25 basis points. ?Rate cuts are still expected irrespective of the inflation number,? said a senior bond trader at a state-owned bank.
?It is reasonable to expect a 25 basis points rate cut on Monday given the weak growth,? said Sandeep Bagla, senior vice-president at ICICI Securities Primary Dealership. Bagla expects the RBI to cut the cash reserve ratio as well to ease liquidity conditions.The new 10-year bond yield had slipped below 8% intra day before the release of Inflation numbers. The 8.79%, 2021 bond yield has fallen nearly 50 basis points from its peak in April and is down 10 basis points since January. Analysts said that with core inflation remaining below 5%, weak GDP growth would prod RBI to cut rates next week. Dealers expect yields to remain subdued ahead of the policy review and due to absence of an bond auction this week.
