Indian bond yields crawl up

Indian federal bond yields crawled higher on Friday as sentiment in the market tilted towards risk aversion before the central bank's monetary policy review scheduled for Tuesday. Dealers said the outcome of the $2.41 billion debt sale also failed to elicit a response in the market as the cut-off yields set by the Reserve Bank of India (RBI) were in-line with estimates.
"Traders are not going to be interested in taking big risks going into the policy week," said Vivek Rajpal, interest rate strategist at Nomura Financial Advisory & Securities (India). Bond yields have been under pressure through this month as market participants fear stringent monetary action from the RBI to curb the surging inflation. But now most analysts bet the central bank will avoid a tough monetary stance at the January 25 policy review and limit a rate increase to 25 basis points, to ensure economic growth is not squeezed by its fight to rein in inflation.
"The high growth-high inflation scenario in India means policy dilemna for the government. You cannot let inflation go too high because it will hurt the growth story but you cannot act erroneously on inflation fear as that will also hurt the growth," said Taimur Baig, a chief economist at Deutsche Bank, in a press briefing on Friday.
Baig expects India's gross domestic product to rise 8.5 percent in the next fiscal year that begins April 1, while he expects inflation to stay around the 8 percent mark in calendar year 2011. The central bank projects inflation of around 5.5 percent by end of March.
India's headline inflation accelerated in December on costlier food items as per data released last Friday. The wholesale price index (WPI), India's main inflation gauge, rose an annual 8.43 percent in December from 7.48 percent in November. The yield on the most-traded 8.08 percent, 2022 bond ended at 8.25 percent, up 4 basis points from Thursday's close.
The second-most 7.99 percent, 2017 bond ended at 8.18 percent, up 5 basis points from previous close while the illiquid benchmark 10-year bond ended at 8.116 percent, up 3 basis points The benchmark five-year swap rate ended at 8.04 percent, up 5 basis points from Thursday, while the one-year swap rate closed down 1 basis point on the day at 7.41 percent. Volumes in the bond market were lower at 41.75 billion rupees ($915 million) as per data from Clearing Corp of India, against a usual turnover of 70 billion-80 billion rupees.