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India 10-yr yields spikes to 7-year high over 9 pct

Reuters - Saturday, July 5

By V. Ramakrishnan

MUMBAI, July 4 - Indian 10-year bond yields jumped as much as 37 basis points to seven-year highs above 9 percent on Friday as auction results showing weak demand added to worries about central bank action after a further rise in inflation.

Dealers said the cut-off prices at auctions of 100 billion rupees of government bonds were sharply lower than market expectations.

The yield on the 10-year federal bond <IN082418G=CC> ended at 9.16 percent, higher than Thursday's close of 8.81 percent. In late trade it hit a high of 9.18 percent, its highest since early October 2001.

"The outlook is bearish and there will be no relief in the immediate future," a dealer with a state-run bank said.

"The cut-off has also worsened sentiment," he said.

India's annual inflation rate rose to 11.63 percent on June 21, above forecasts and its highest since the series began in 1995, which analysts said raised the chances of an interest rate increase this month to follow the two in June. See [ID:nBOM39838]

Last month, the central bank raised its key lending rate by 75 basis points and also announced a 50 basis point increase in banks' reserve requirement to contain inflationary expectations.

The first stage of the reserves increase takes effect on Saturday, draining about 80 billion rupees of funds from the banking system. The second phase takes effect on July 19.

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