Mumbai: The benchmark bond yield, which touched a six-month high last week on inflation and monsoon fears, is likely to ease now after the government said concerns over deficient rains are misplaced and ruled out any food crisis as there are abundant stocks.
The yield on 10-year old bond -- 8.40 per cent-2024 -- rose by around 19 basis points to 8.01 per cent in the previous week, which was highest since December 1.
"The last week's sell-off was on account of hawkish policy stance by the Reserve Bank, which increased its inflation projections and also as the Met Department forecast deficient monsoons. The reaction was temporary and it seems to be over now," said a chief dealer with a state-owned bank.
In the second bi-monthly monetary policy announced on June 2, RBI Governor Raghuram Rajan had said inflation is expected to be pulled down by base effects till August but start rising thereafter to about 6 per cent by January 2016, slightly higher than the projections of 5.8 per cent in April.
Rajan also said below-normal monsoons, firming of crude prices and external environment volatility continue to play upside risks to inflation.
Soon after the policy announcement when Rajan had cut repo rate by 25 bps to 7.25 per cent, the Met Department had revised its monsoon forecast from 93 per cent to 88 per cent of long period average (LPA), with the northwest region forecast to be hit the most.
"We are hoping that the yield on the old 10-year will stabilise at 7.85 per cent and the new 10-year (7.72%-2025) at 7.70 per cent now as the government has said it will take care of all supply-side measures (in case of deficient monsoon)," said a dealer with another state-run bank.
Market participants see improvement in yields this month.
Last week, Finance Minister Arun Jaitley had tried to allay fears over a possible drought and the resultant spike in inflation, saying conclusions on that basis either on inflation or some kind of distress situation are "far-fetched".
"The kind of speculation that we have been seeing and speculative analysis that we have been reading about appears to be somewhat misplaced," Jaitley had said.
He expressed confidence that foodgrain production would not be hit if at all rains fail badly in the northwestern region as the area was well-irrigated while monsoon would be normal in all other parts.
Bankers said market is still hoping for one or two rate cuts later in the fiscal.
"We have discounted worst, in terms for deficient monsoons, and are expecting two more rate cuts this fiscal and then may be hike," said a senior dealer with a public sector bank.
