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Bond Yields Rise

With the RBI tightening the noose on inflation through yet another CRR hike and inflation rising to 6.73 per cent, bond yields have skyrocketed

Bond yields were on a spiral ascent through the week; the market started warming up to the possibility of a rate hike on Monday, February 12, owing to strong industrial output data.
Just when liquidity was showing signs of easing up (the liquidity adjustment facility repo window saw a bid after 4 days on February 14, 2007), the RBI played spoilt sport and hiked the CRR by 50 basis points. The new rates become effective first on February 17, wherein the new rate would be 5.75 per cent, followed by 6 per cent effective March 3, 2007. While the reaction of the RBI is in line with efforts to rein in inflation, the bond market reacted quite severely with the yield on the 10 year benchmark 8.07 per cent GOI 2017 bond rising to 8.09 per cent on February 14, 2007.
There was finally a respite on Thursday, February 15, 2007 with the reduction in the prices of petrol and diesel. Consequently, the yield on the 10-year benchmark bond settled three basis points lower at 8.06 per cent. The markets were closed on Friday, February 16.
Traders expect inflationary pressures to ease by sometime in early March. Further the comments of the US Federal Reserve Chairman, pointing towards an ease up in inflation also reassured traders that an increase in the U.S rates was unlikely.
Outlook
The general sentiment in the market is that all the fiscal and monetary policy measures taken by the government and central bank together will bear fruit sooner than later. In fact the inflationary pressures are likely to ease over the coming two weeks. At the same time liquidity is likely to be very tight owing to the CRR hike. This is likely to hit volumes.