Inflation at 2-Year High | Value Research Yield on the 10-year benchmark 8.07 per cent GOI 2017 rose by 7 bps during the week to end at 7.82 per cent on the back of high inflation and rising oil
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Inflation at 2-Year High

Yield on the 10-year benchmark 8.07 per cent GOI 2017 rose by 7 bps during the week to end at 7.82 per cent on the back of high inflation and rising oil

The overall impact of the high inflation did not create panic in the market, given the escalation was expected by most traders. The yield on the 10-year benchmark 8.07 per cent GOI 2017 rose by 2 basis points from its previous close on Friday.

Potential losses were curbed by the successful auction of 7-year bond (Rs 6,000 crore) and the 29-year bond (Rs 3,000 crore) on February 9. For the 7-year bond, the central bank set the cut-off yield at 7.8759 per cent which later traded at 7.82 per cent after the auction. There was considerable trading in the 29-year, 8.33 per cent GOI 2036 bond, and the yield on this instrument fell to 7.98 per cent on Monday, with traders expecting the yield to fall post the auction. The cut-off yield fixed by the central bank for the 29-year bond was 8.1898 percent, which traded at 8.12 per cent after the auction.

An improvement in the liquidity position of banks over Thursday and Friday also helped in reviving sentiment, with banks abstaining from borrowing funds from the daily repo auction over the two days. This was reflected in improvement in call rates as well which dropped to 6.4-6.6 per cent on February 9 from a high of 7.9-8 per cent on February 5.

Consequently, the yield on the 10-year benchmark 8.07 per cent GOI 2017 rose by 7 basis points during the week to end at 7.82 per cent.

However, the market did see a potential threat in the rising oil prices. Global oil prices began an upward trek towards the end of last week and the rally in the prices only strengthened. The week ahead does not look too good with the shutdown of a California oil field following an explosion and fire.

Outlook
Traders are likely to react to the ever mounting inflation over the coming week with fears about the central bank further tightening its stance on inflation and interest rates. For the time being the central bank has resorted to short term measure like allowing the rupee to strengthen, thereby reducing money supply. With many banks offering higher rates on term deposits, the easing liquidity is likely to add buoyancy in the market over the forthcoming week. However rising oil prices could play spoilt sport.


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