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Friday, January 24, 2020

Bond yields spike as CPI inflation jumps

The 10-year benchmark yield had ended at 6.60 per cent on Monday, compared to the previous close of 6.59 per cent on Friday. When bond yield rises, prices decline.

By: ENS Economic Bureau | Mumbai | Updated: January 15, 2020 4:42:53 am
Bond sale, CPI inflation, CPI inflation jumps, indian economy, indian express The yield opened at 6.15 per cent mark and moved up further to close at 6.67 per cent amid expectations that the Reserve Bank of India (RBI) might continue the pause in policy interest rates.

The yield on the 10-year benchmark government bonds on Tuesday rose sharply to 6.67 per cent, as consumer price index-based inflation rose to the 7.35 per cent-mark for December 2019. The yield opened at 6.15 per cent mark and moved up further to close at 6.67 per cent amid expectations that the Reserve Bank of India (RBI) might continue the pause in policy interest rates.

The 10-year benchmark yield had ended at 6.60 per cent on Monday, compared to the previous close of 6.59 per cent on Friday. When bond yield rises, prices decline.

However, despite weak macro-economic data, the 30-share BSE Sensex hit life-time high of 41,994.26 in the day’s trade and finally settled up by 92.94 points or 0.22 per cent at 41,952.63, its all-time closing high. The broader Nifty50 scaled a life-time high (intra-day) of 12,374.25, before ending 32.75 points, or 0.27 per cent, higher at 12,362.30, which is its record closing level. Sensex is likely to hit the 42,000-level in the coming days, analysts said.

The rupee slipped by 1 paise to close at 70.87 against the US dollar ahead of the signing of the US-China trade deal and weak macro-economic data on the domestic front.

Despite sluggish economic activity, core CPI inflation may not moderate much as the full impact of the telecom tariff is yet to play out. “Factoring in these developments, we now expect CPI inflation to trend towards 6.2 per cent by March 2020.

Even though we acknowledge that the output gap remains negative and that any growth recovery is likely to be slow and prolonged, the RBI’s MPC is expected to remain concerned about the significantly high CPI inflation,” said a Kotak Securities report.

With inflation likely to remain 120-320 bps above the MPC’s comfort zone of 4 per cent until November 2020, the RBI policy panel will find it difficult to ease its monetary policy further, especially given the risks of fiscal slippage.

“Persistently high headline inflation has meaningfully increased the probability of a shift in the policy stance from accommodative to neutral in the upcoming MPC meeting,” it said.

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