Government bonds fell on Thursday as higher global oil prices added to the cautious mood ahead of a debt auction later in the day. The most-traded 6.68 per cent 2031 bond yield was up at 7.60 per cent from 7.55 per cent on Wednesday
According to traders, rise in oil prices will add to upside pressure on inflation as well as potentially widen the fiscal deficit. Bond markets are already skittish about RBI turning more hawkish after consumer inflation hit 5.21 per cent in December, above 4 per cent target.
Global oil prices breached the psychologically key $70-mark on Thursday, their highest since December 2014, on a weaker dollar and decline in US crude inventories.
The government will issue Rs 11,000 crore ($1.73 billion) of bonds later in the day which is expected to be fully sold though at about 3-4 basis points higher than the current market levels, two traders say.
Demand from state banks is likely to remain muted after RBI Deputy Governor Viral Acharya warned them of increased interest rate risks due to over-exposure to government bonds.