The Telegraph
Since 1st March, 1999
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Price spike ratchets up bond yields & rate fears

Mumbai, June 25: Bond yields soared as the spike in inflation rate to 5.9 per cent stoked simmering fears that a rise in rates was imminent.

Ten-year government bonds (gilts) were fetching 5.83 per cent, a return not seen for more than a year, after figures showed a build-up in price pressures for the week ended June 12. The bonds peaked at 5.9 per cent today.

With a 6 per cent inflation rate a distinct possibility next week, analysts reckon that the Reserve Bank of India (RBI) could ratchet up the repo rate — a short-term benchmark now at 4.5 per cent — by 25 basis points.

Bond prices, which move in a direction opposite the yields, have been sliding over the past few days due to price fears. RBI governor Y. V. Reddy has said recently the central bank might have to revisit its monetary policy if overseas rates rise faster than expected.

The jump in inflation to 5.89 per cent, the fifth straight week of increase, was fuelled by dearer fruits, vegetables, tea, eggs, minerals and manufactured products.

Many expect it to top 6 per cent when fresh figures are released next week. The spurt will be fuelled by the increase in prices of petro products and other energy sources like coal. The government had decided to ramp up petrol prices by Rs 2 a litre, diesel by Re 1 per litre and that of cooking gas by Rs 20 per cylinder on June 15.

The inflation rate was 5.55 per cent in the previous week (June 5) and 4.97 per cent a year ago. The wholesale price index (WPI) was up 0.4 per cent to 183.4 points from 173.2 a year ago, mainly due to a rise in prices of primary articles by 0.2 per cent and manufactured products by 0.6 per cent. After the revision, the final WPI stood at 181 against the provisional figure of 180.5 on April 17. The final rate was 4.68 per cent compared with 4.4 per cent (provisional).

Fed pointers

As the price-line crept up eerily at home, the rumbles of a rate hike abroad got unmistakably louder. Top Wall Street economists feel an increase in the Federal Reserve’s official interest rate to 1.25 per cent next week is “baked in the cake”, and they expect only minor tweaks in the bank’s comments.

A Reuters poll taken on Thursday found a view that the Fed will repeat a promise to raise rates at only a “measured” pace, and softer-than-expected investment figures on Thursday reinforced that expectation.

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