India's 10-year G-sec yield pierces 8% mark

The yield on India's 10-year benchmark government bond crossed 8% for the first time since October 2008 amid concerns that a spiraling inflation would force the Reserve Bank of India (RBI) to raise interest rates in April. At the end of the week, the yield on 6.35% paper expiring in 2020 stood at 7.99% while the price of the underlying security stood at Rs88.96. On March 5, the yield on the benchmark G-sec note closed at 7.97%. The Union Budget for 2010-11, which was presented to the parliament on February 26, set the tone for bond yields. The Budget is seen as inflationary with a rise in Government spending and excise duties. Fuel prices rose after the Budget, leading to expectations that inflation will touch double digits in a few weeks. The Finance Minister also unveiled a Rs457,000 crore gross borrowing programme in the fiscal year 2010-11. The Government has indicated that the borrowing will be front-loaded with 70% of the borrowing being completed in the April-September period. Separately, media reports suggest that the market is shifting to the 7.02% 2016 bond as a substitute. Trading volume in this bond has moved higher than the volume in the 6.35% 2020 bond. The spread between the 6.35% 2020 bond and the 7.02% 2016 bond has widened.