Responding to the rising inflation, prices of the 10-year government bonds declined further, pushing the yield to seven-year high at 9.55 per cent.

It also raised concern that the Reserve Bank of India [Get Quote] may hike interest rates in its review of the monetary policy 2008-09, scheduled on July 29.

Yield on the benchmark 8.24 per cent note, due in April 2018, rose 30 basis points this week to 9.45 per cent at 5:30 pm. It had hit an intraday peak of 9.55 per cent, its highest since September 2001. The bond price fell by 1.81 per cent to 92.34.

Inflation soared to 11.89 per cent for the week ended June 28. "Inflation is not going to cool down anytime soon and the sentiment is bearish because more rate tightening is expected," a dealer with a state-run bank said. 

The benchmark 10-year yield may touch 10 per cent should inflation hold around 12 per cent for more than a month, said Suresh Pai, head of fixed-income trading at Canara Bank [Get Quote].

There is a widely-held market view the RBI will continue with a tight monetary stance. However, this may not mean immediate action by monetary authority, last tranche of 25 basis point hike in cash reserve ratio will come only next week.

• Inflation, the silent killer!