Indian federal bond yields ended higher in thin trade on Friday, dragged by growing expectations of another rate increase at the central bank's review next Tuesday and supply worries. The 10-year benchmark yield ended up 3 basis points at 8.82 percent, after moving in a 8.79 to 8.84 percent band.
"Basically, it is because of the higher inflation and we also have the additional borrowing by the government," said N.S. Venkatesh, treasurer at IDBI Bank. The government is scheduled to borrow 2.2 trillion rupees through dated securities during October-March instead of the previous estimates of 1.67 trillion, it said late last month.
Traders broadly expect the yields to move in a 8.75-8.85 percent band until the Reserve Bank of India's policy review. Some dealers said the RBI could increase its key lending rate by 50 basis points to tackle sticky inflation, while some others said the tightening cycle could get elongated, following hawkish comments by a top adviser to the government.
"There have been hawkish comments by Rangarajan yesterday. There are chances of a 50 (bps hike)," a trader with a primary dealership said. C. Rangarajan, the chairman of the prime minister's economic advisory council, said on Thursday Asia's third-largest economy needs to use both fiscal and monetary methods to tame inflation and to maintain high growth.
India's food price index rose 10.60 percent and the fuel price index climbed 15.17 percent in the year to October 8, higher than previous week's 9.32 percent and 15.10 percent, respectively, data on Thursday showed. India's headline inflation barely budged in September, staying above 9 percent for the tenth straight month.
Total volume on the central bank's electronic trading platform was 64.20 billion rupees ($1.28 billion), lower than the average daily volume of 90 billion to 100 billion rupees. Traders preferred to stay on the sidelines ahead of the policy on Tuesday and the eurozone summit over the weekend. "With so less appetite for bonds, traders are already reluctant to take a big position," a trader with a private bank said.
Leaders of the 17-nation eurozone will now hold a second summit next Wednesday to thrash out the toughest issues of how to maximise the bloc's financial rescue fund and how to reduce Greece's debt, because Merkel will not be empowered to conclude agreements when they meet in Brussels on Sunday. The benchmark five-year swap ended up 7 basis point at 7.45 percent while the one-year rate closed 9 bps higher at 8.31 percent.
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