Finance News

Bond yields at 1-week low as oil prices fall

On Monday, bond yields closed at their lowest in a week, as investors expected a fall in oil prices would ease pressure on the government to raise state-set fuel prices, a key driver of inflation.

The 10-year bond yield ended at 9.20%, compared to Friday's close of 9.25%. Last week, the yield hit 9.54%, a notch below a seven-year high hit in June. "Lower oil prices provided an opportunity for investors to cover short-positions," a dealer with a mutual fund said.

The government sharply raised prices of petrol, diesel, and cooking gas in early June, a move, which pushed inflation into double digits.

Annual wholesale price inflation was 11.98% on July 19, its highest since the current series became available in 1995. Although oil prices have fallen from a peak of over $147 a barrel hit in mid-July, the central bank said last week that the pass-through to consumers was not complete even at current levels.

On Monday, US crude fell about $2 during Indian bond trading hours. Rising prices have been the main concern of the government, which will be facing elections before May 2009.

Last week, on Tuesday, to combat inflation, the central bank raised its key lending rate and CRR by 50 bps and 25 bps respectively, 9%. The government sells Rs 10,000 crore of bonds on Friday and dealers expect a good appetite from banks' needing to meet their statutory reserve requirements. Meanwhile, the rupee eased as losses in the share market hurt sentiment and investors fretted that a lift in oil prices from recent lows would spur dollar demand and widen the trade deficit further.

It ended at 42.49/50 per dollar, 0.3% weaker than 42.35/36 at close on Friday.

India's main share index snapped a three-day winning streak and eased 0.5%, led lower by Reliance Industries, on renewed worries about the US economy and the impact of firm oil prices. "We have reverted to the underlying fundamentals, where oil prices are higher and the stock market not looking too good, so in the coming days dollar demand is expected to be fairly strong," said V Rajagopal, head of foreign exchange trading at Kotak Mahindra Bank.

"Oil prices have rebounded from $120 per barrel levels, so the underlying fact is that there is scope for the rupee to depreciate. We may see the rupee at 42.80-43.00 levels by the end of this week," he added. Foreign funds have been net sellers of $6.8 billion worth of Indian stocks so far in 2008, after buying a record $17.4 billion the previous year. Data on Friday showed the deficit narrowed slightly in June from an all-time high of $10.77 billion in May but the higher cost of oil imports continues to weigh and the April-June deficit was 42% larger than in the same period a year ago.

—Agencies