India’s 10-year benchmark sovereign bond yield retreated below 7% on lower than expected domestic and US inflation prints, although calling the formal start to an easing cycle is rather difficult still after last week’s Mint Road assertion that domestic conditions largely would dictate its monetary policy approach.
Yield on the 10-year securities retreated to 6.98% Thursday after India’s retail inflation eased to a one-year low of 4.75% in May, as against an 11-month low of 4.83% the previous month.
A fall in government bond yields lowers borrowing costs across the economy as sovereign debt yields are the benchmarks for determining price of corporate borrowing.
Yield on the 10-year benchmark government security closed at 6.987% on Thursday. Bond prices and yields move inversely.
“The Indian inflation data has been printing lower than expected and the RBI has space to lower it, but looking at the prices of commodities they have chosen not to tinker with it,” said Naveen Singh, Head of Trading at ICICI Securities PD. “We also have the final budget coming up and foreign investors may start buying because of bond index inclusion, so we will gradually see yields shifting towards 6.90%”, he said.
The US inflation data eased at 3.3% in May, from 3.4% a month earlier, but the Federal Reserve has not changed their expectations on inflation.
“Yes it has printed lower, but the distribution in terms has been all over the place, like the consumption and wage data is still going strong. The Fed is optimistic but they want to verify and see if inflation actually comes lower,” Singh said.
The rupee remained flattish, with the rupee closing at 83.542 against the U.S. dollar on thursday, almost unchanged from its previous close at 83.545
“With the bond index inclusion starting soon and foreign investors gradually starting to buy both in equities and bonds, the rupee can sharply appreciate if RBI does not intervene”, said Dilip Parmar, Research Analyst at HDFC Securities. “So far the RBI has been pre-emptive, so 83.30/$1 may be the near-term support, while on the lower side we may see rupee go to 83.60/$,” he said.
