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10-year Yield Crosses 8 per cent

Bond markets remained distressed during the week ending June 23, 2006. The yield on the 10-year bond crossed 8 per cent mark, while the inflation climbed to its one-year high

Bond yields rose sharply during the week ended June 23, 2006. The yield on the benchmark 10-year bond crossed 8 per cent amid bearish sentiments. Volumes on the wholesale debt markets also remained thin.

On June 22, 2006, the RBI auctioned the 7.37 per cent GOI 2014 bond worth Rs 5,000 crore and the 7.94 per cent GOI 2021 bond worth Rs 4,000 crore. Last week, the government had surprised the market participants by increasing the size of the auction from Rs 5,000 crore to Rs 9,000 crore. This week though, the government clarified that the additional amount will be adjusted against the remaining auctions scheduled for this year, and it should not be considered as a hike in the overall planned borrowing.

The markets started off in a jittery fashion and the yields kept rising throughout the week. Expectations of further rate hikes and higher inflation kept the traders on the sidelines. The yield on the benchmark 7.59 per cent GOI 2016 bond ended the week at 8.11 per cent, up a massive 32 basis points from its last Friday's close.

Rising inflation (which is currently at its one-year high) also supports the expectations of a hike in the short term interest rates in the forthcoming policy review in July. For the 12-month period ending June 10, 2006, inflation rose to 5.24 per cent, up from previous week's 4.72 per cent. It had last crossed the 5 per cent mark in May 2005. Higher fuel prices and costlier food items contributed to the rise.

Rupee appreciated against the US dollar initially, but declined subsequently to end weaker at 46.2 per US dollar. Dollar demand from oil companies pushed the Indian currency lower. Call rates remained in the range of 5.75-5.85 per cent throughout the week.