Inflation at 16%, Falling Bond Yields

The wholesale price index is on fire yet again. The latest data – for May 1 – shows primary articles at 16.76% inflation, with the index widening 2.5% from just the week earlier to 299.5.

(My earlier reports had some incorrect data for the middle of 2009, apologies)

This isn’t very good because WPI’s overall index – released only once a month now – is hugely dependent on primary articles inflation. The Monthly index (till March):

Plus, remember, fuel prices are up and are likely to go up some more. Credit growth has now crossed 17%, and that’s again reaching territory where it could fuel even higher inflation.

And strangely, in this process, the 10-year bond yield has been going down! Meaning, more people are buying bonds. In the last one week, the 10 year bond has actually increased in value (which brings yields down)

The new benchmark 7.8% 2020 bond was only introduced two weeks ago, so there might be a flight to move from the old 10-year (6.35% 2010) to the new one, thus increasing the price of the new benchmark bond artificially as people buy it after selling the old bond. Still, the last two weeks have been seriously turbulent abroad, as government bonds got battered – seems like it had little impact on us.

And, looking at this it seems the market expects no interest rate hike despite high headline inflation numbers.

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