Indian bonds gain as investors wary ahead of RBI monetary policy, US employment data eyed

The Indian government bonds gained on Thursday as investors were cautious ahead of US employment report on Friday and the Reserve Bank of India's monetary policy meeting next week. The yield on the benchmark 10-year bonds rose more than ½ basis point to 7.482 percent, yield on super-long 30-year bonds jumped 1 basis point to 7.860 percent and short-term 2-year bonds yield also climbed more than ½ basis points to 7.108 percent by 06:30 GMT.

The Reserve Bank of India is due to release its monetary policy statement next week on Tuesday 7 June (at 05:30 GMT), and is expected to leave the repo rate at 6.50 percent. The possibility of the Reserve Bank of India cutting rates further has eased out with the nation’s April inflation figures impressive. Other factors, apart from a basket of demand and supply dynamics have also played to keep the central bank away from slashing rates. A couple of domestic as well as overseas catalysts are also in place to narrow the odds out.

However, warmer than usual weather conditions, despite positive forecasts of monsoon this year, have underpinned food inflation in May 2016. Evenly spread of monsoon rains will be beneficial to keep inflation under check and prevent a disappointment over the inflationary expectations.

Yesterday, the economy expanded faster than expected in first quarter of 2016, by 7.9 percent y/y, higher than the market consensus of 7.5 percent y/y after a downwardly revised reading of 7.2 percent y/y in Q415, reinforcing our view that India is a bright spot in Asia. And we believe that this is going to continue in the coming quarters as private and government consumption will remain strong.

In additions, markets will look forward to cues on arrival and distribution of annual monsoon rainfall. However, clear focus is now placed on the May employment on Friday which could go a long way in bolstering market expectations for a summer rate hike from the Fed. Meanwhile, the Sensex fell 0.17 percent or 46 points to 26,667.82 and Nifty-50 futures trading dipped 0.20 percent or 10.25 points at 8,182 by 07:00 GMT.