Indian 10-year bond yields hit lowest since February 2009, inch away from 6 pct target

The Indian 10-year bond yields hit lowest since February 2009 Friday on rising speculation that the Reserve Bank of India will lower its repo rate by 25 basis points to 6 percent in its next month monetary policy meeting. Also, 10-year yield stands an inch away from our previous forecast of 6 percent.

The yield on the benchmark 10-year bonds, which moves inversely to its price, fell 10 basis points to 6.18 percent from yesterday’s 6.28 percent, the yield on long-term 30-year note dipped 2-1/2 basis points to 6.63 percent and the yield on short-term 2-year note slid 3 basis points to 5.97 percent, from yesterday’s 6.06 percent.

India’s October consumer price index (CPI) Inflation fell to 14-month low to 4.20 percent m/m, compared to 4.31 percent m/m. Food Inflation came in at 3.2 percent as against 3.96 percent in September 2016. Further, cereals and products Inflation rose 4.4 percent over 4.17 percent, data released showed Tuesday.

Additionally, October wholesale price index fell unexpectedly to 3.39 percent led by easing prices of food items and non-food items, against market expectations for a rise to 3.75 percent, from 3.57 percent in the preceding month. Surprisingly lower inflation rate bolstered hopes for a December interest rate cut by the Reserve Bank of India (RBI).

The Indian central government, led by Prime Minister Narendra Modi abolished the circulation of INR500 and INR1,000 notes in order to curb black money. Further, Modi suggested the Indian citizens to exchange the respective notes from any commercial banks or nearby post office from November 10 to December 30.

The recent demonetisation drive of India government could be disinflationary in the near term and therefore strengthen the case for the Reserve Bank of India to ease in December.

The RBI next bi-monthly two-day monetary policy meeting is scheduled to be held on December 6-7. It is widely expected that the current trend of lower inflation expectations will space for the Governor Urjit Patel for further monetary easing.

Meanwhile, the Sensex rose 1.43 percent or 369 points to 26,229 and Nifty-50 futures traded 1.10 percent higher or 90 points at 8,100 by 07:20 GMT.