MUMBAI: Indian federal bonds erased intraday gains to fall on Monday after the head of Indian Oil Corp said his firm was looking to raise petrol prices at the earliest possible opportunity, triggering concerns domestic inflation could surge and prompt the central bank to take aggressive rate action.
"People are still contemplating whether the Reserve Bank of India will do a 25 basis point or 50 basis point rate hike," said Vivek Rajpal, interest rate strategist at Nomura.
"In such a backdrop, any bad news on inflation will reflect the low holding capacity of leveraged players. This is what happened today."
The most-traded 10-year 7.80 percent 2021 bond yield ended 6 basis points higher on the day at 8.12 percent, or at 97.85 rupees, down from 98.27 rupees at last close. Intraday, the 2021 bond yield had dropped to 8.03 percent.
Nomura's Rajpal expects the new 10-year bond to find buyers near yields of 8.15-8.20 percent.
The second most-traded 8.08 percent 2022 bond yield settled 4 basis points higher at 8.28 percent or 98.55 rupees, lower from 98.835 rupees Thursday.
Volumes in the bond market was 62.80 billion rupees ($1.41 billion) against usual turnover of 80 billion-100 billion rupees, data from the central bank's electronic reporting platform showed.
The benchmark five-year swap rate ended 3 basis points higher at 8.29 percent after touching 8.31 percent, a level last seen on Oct. 1, 2008.
The one-year swap rate settled 2 basis points up on the day at 7.82 percent after touching a high of 7.84 percent, its highest since Oct. 8, 2008.
Both swaps and bonds markets were closed for Good Friday.
Oil rose above $124 a barrel on Monday, pushed higher by an escalation of violence in the oil-producing Middle East, as well as post-election unrest in OPEC member Nigeria.
New Delhi is expected to allow a diesel price rise once elections in handful of states are completed next month.
Indian Oil Corp said on Monday it was looking to raise petrol prices at the earliest possible opportunity as current retail prices are related to global prices at $100 a barrel.
But towards end of trade, a senior finance ministry official told Reuters absorbing high crude prices for some time was better than passing them through.
India meets most of its crude oil needs through imports and any pass through of increased global oil costs spurs domestic inflation, which touched 9 percent in March and increased pressure on the RBI for taking bolder action on rates.
The central bank has already raised key rates eight times since March 2010 and economists have said it now faces a more acute growth-inflation dilemma than at any time in recent past.
Earlier in the day, bond prices had risen following fresh limits for the government's short-term borrowing from the central bank via ways and means advances and also due to the absence of a debt sale this week.
India's central bank on Saturday announced new short-term borrowing limits for the federal government, saying the maximum it can borrow under the ways and means advances is 300 billion rupees for April 1 to April 20 and 450 billion rupees for the April 21 to June 30 period.
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