Indian bond yields drop

Indian federal bond yields dropped on Friday as a sharp decline in global crude oil prices helped ease worries over a sustained rise in domestic inflation, but an expected increase in local fuel prices later in the day pulled yields off their lows.
The 10-year benchmark bond yield closed at 8.24 percent, off its low of 8.23 percent, and down 3 basis point from Thursday's close. It traded in a narrow range of 8.23 to 8.26 percent during the session. The 10-year yield closed down 3 basis points on the week. Total volumes on the central bank's electronic trading platform were at a moderate 95.40 billion rupees ($2.12 billion).
"Yields dropped tracking lower global oil prices, on expectations inflation may also start to taper off, which would ease pressure on the central bank to raise rates. There are expectations for a maximum of two 25 basis points hikes, going ahead," said N. S. Venkatesh, head of treasury at IDBI Bank.
"The 10-year bond yield should hold in a broad 8.15 to 8.30 percent band with quarter-end demand from banks and bond redemptions helping," he added. Oil's deep sell-off paused on Friday as the impact of a surprise announcement of an emergency stocks release faded.
The International Energy Agency announced it would inject 60 million barrels of government-held stocks in the global market, immediately increasing world supply by some 2.5 percent for the next month. Traders will now await a decision on raising domestic fuel prices for further cues. The market had broadly factored in an upto 4 rupee hike in diesel prices but a bigger increase could again stoke inflation concerns and push up bond yields by 3 to 5 basis points on Monday, they said.
India was expected to raise diesel prices on Friday, although a delay in a government meeting to decide on the politically unpopular decision raised questions as to whether or not officials were in full agreement. "The talk about a fuel price hike has been there for quite some time, and there were also talks of a 4 rupee raise in diesel prices, so that is already discounted by the market. The actual impact will be seen, when the related inflation numbers are released," a senior dealer with a foreign bank said.
The benchmark five-year interest rate swap closed down 8 bps at 7.63 percent, while the one-year swap rate ended down 1 basis point at 7.96 percent. Dealers said the longend of the swap curve was down due to some risk aversion in the euro zone and lower global crude, but the short-end stayed anchored on expectations of further rate increases by the central bank and tight cash conditions.
The euro dipped against the dollar on Friday on news that shares in some Italian banks had been suspended from trading and continued nervousness over Greece's ability to execute austerity measures. India sold 120 billion rupees ($2.7 billion) of bonds earlier in the day and the outflows will occur on Monday. Traders said the cut-offs were broadly-in-line and thus failed to have much impact on the market.