India’s 10-year benchmark government bond yield on Tuesday hit an intraday high of 7.23 percent before settling down near its overnight close of 7.17 percent, as investors remained cautious ahead of the release of consumer price inflation data and industrial output data, both due later in the day.
The 10-year benchmark gilt yield ended the day at 7.17 percent, unchanged from its previous close, after touching an intraday high of 7.23 percent.
Had the yield ended at its intraday high, it would have been the highest closing level for it in 17 months. The 10-year gilt yield had risen 8 basis points on Monday and ended at a 7.17 percent, its highest closing level in the last 15 months.
The point of worry for investors seems to be the possibility of any signs of a further uptick in inflation, dealers said. The other thing the market will be keeping an eye on is a potential decline in liquidity.
According to a survey by Bloomberg, consumer prices are expected to have risen 4.28 percent in November, which would be its fastest pace in well over a year.
Market participants said that the outlook on yields of government bonds was fairly bearish at the moment, with demand for bonds seen declining as we approach the end of the year. This is primarily because companies sap liquidity at banks, which are typically the largest holders of government bonds, to make advance-tax payments this time of year.
“Where yield will go from here will be a function of technical factors like demand and supply, rather than fundamental factors,” said Dwijendra Srivastava, Chief Investment Officer – Debt at Sundaram Mutual Fund.
“Considering the government’s possible commentary on fiscal expenditure in January and the possibility of RBI intervening in the bond market this month, I would peg yields to remain inside a wide range of 7.05-7.40 percent,” Srivastava said.
He explained that if the government concludes that it will be overshooting its budgeted expenditure for the year and comes to the bond market for the funds, bond yields will rise further as liquidity in the system will go up.However, Srivastava added that the real interest rate in the domestic market is still going to be attractive for investors, even if inflation hits 4.5 percent. “From a global perspective, even if inflation goes to 4.5 (percent) or Fed hikes rates, the outlook on India is still expected to be fairly positive,” he said.