Indian bonds gain as investors cover previous short positions

The Indian government bonds gained Wednesday as investors covered previous short positions. The yield on the benchmark 10-year bonds, which moves inversely to its price, fell 1/2 basis point to 7.155 percent, the yield on super-long 30-year bond also dipped 1-1/2 basis points to 7.318 percent by 07:30 GMT.

According to Reuters, India’s federal government will sell four notes worth 140 billion rupees on Aug. 26, including 80 billion rupees of the benchmark paper, which will take its issuance to 870 billion rupees. The RBI typically stops issuance of a note once its total outstanding reaches 850 billion rupees to 950 billion rupees.

Bond prices slumped Tuesday after the appointment of hawkish Urjit Patel as the new governor of the Reserve Bank of India, with effect from September 4. Urijit Patel, current deputy governor, was expected as the only hawkish candidate for Governor chair. As Chairman of the Urjit Patel committee, he advised moving to a consumer inflation target of 4 – 2 percent and towards positive real interest rates.

“We view the appointment positively, he should ensure a smooth transition, policy continuity, and provide a favourable environment for RBI to build on the good progress in the last three years,”said Commerzbank in its daily market report.

He should be well received by the markets as a safe and competent successor to Dr Raghuram Rajan and the markets will expect him to press ahead with bank reforms and to address non-performing assets (NPA). With inflation above RBI’s 2-6 percent medium term target band and above RBI’s 5 percent target for the current fiscal year, we expect RBI to stay on hold near term. A good monsoon leading to lower food prices could pave the way for another 25 basis points cut in the last quarter of 2016. For USD-INR, we expect it to continue to hold within the 66.50-68.00 range, it added.

Meanwhile, the Sensex rose 0.02 percent or 6.68 points to 27,996.89 and Nifty-50 futures traded 0.45 percent higher or 40.25 points at 8,695.65 by 08:00 GMT.