Bonds tumble on rise in inflation estimate

Government bonds fell across the board, mainly in the short to medium tenures on a knee-jerk reaction to the raising of the inflation estima...

Government bonds fell across the board, mainly in the short to medium tenures on a knee-jerk reaction to the raising of the inflation estimate to 6.5 per cent and a 0.25 per cent hike in the repo rate to 4.75 per cent by the Reserve Bank of India (RBI).

Says Rajesh Mokashi, ED, CARE: ‘‘Due to rising inflation, RBI has increased repo rate. However, it has kept the reverse repo rate (bank rate) unchanged at 6 per cent. This measure is unlikely to increase lending rate of banks.

However the short term yield on government securities and short-term instruments may harden leading to a flatter yield curve’’.

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The bonds were already reeling under the severe pressure due to spiralling global oil prices.

The gilts received a further setback on inflation estimate rise to 6.5 per cent from the earlier 5 per cent and a hike in the repo rate by 0.25 per cent to 4.75 per cent effective from today, dealers said.

Key bonds at the short to medium term plunged by 80-175 paise on a virtual sell-off with hardly any takers even at rock-bottom levels, a primary dealer said.

Sentiments were further affected after the central bank scaled down the economic growth to 6-6.5 per cent from 6.5-7 per cent in its mid-term credit and economic policy.

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Benchmark, 10-year 7.37 per cent 2014 stock nose-dived by 143 paise to Rs 103.10/20 with the yield surging by over 18 basis points to 6.90 per cent.