Indian bonds marginally up ahead of April retail inflation print

The Indian government bonds were trading modestly firmer on Thursday as investors await the retail inflation data for April, which will provide cues on the possibility of further monetary easing by the Reserve Bank of India. The yield on the benchmark 10-year bonds, which moves inversely to its price stood unchanged at 7.425 pct, 5-year bonds yield fell 2bps to 7.406 pct, and the yield on the 2-year bond dipped 1bp to 7.119 pct by 0720 GMT.

The India’s headline consumer price index (CPI) for April is expected to come in a tad higher from March’s, anticipated to increase 5 pct, from previous 4.83 pct, reducing the odds of further interest rate cuts by the central bank next month. The CPI inflation in the country had decelerated by around 0.9 pct y/y between January and March due to a sharp slowdown in vegetable and fruit inflation, along with pulse, which declined almost 2 pct m/m in March. In addition, lower mansoon rainfall and fuel inflation also aided the prices to fall. On the other hand, it is said that this was mainly due to base effect as strong financial repression by the government in 2015 led to rise in retail prices. But core inflation has averaged about 4.5 pct y/y in the past 21-months and is not indicating any signs of slowing down.

“We expect India’s headline CPI for April 2016 (the first month of the current financial year 2015-16) to print at around 4.9 pct y/y, slightly higher than the March 2016 print of 4.8 pct y/y”, said Societe Generale in a research note.

In April, the Reserve Bank of India lowered the key interest rate, given the sharp slowdown in inflation along with the budget announced the central government in February 2016. This was the central bank’s fifth reduction of rate since January 2015. The RBI is next likely to lower rate in the fourth quarter of this year, until when the central bank expects there is enough transmission of monetary policy action to lending rates.

“Market sentiment remains very balanced and a notable move in yields will happen only if inflation data is above or below expectations and there are no major risks apart from the uncertainty about monsoon,” said Bansi Madhavani, an analyst at India Ratings & Research Pvt. in Mumbai to Bloomberg

According to Reuters, New Delhi to sell INR150 billion of four notes tomorrow, including INR80 billion of benchmark paper and the yield on the benchmark 7.59 pct bond maturing in 2026 is likely to trade in a 7.42 pct-7.46 pct range. Meanwhile, Sensex rose 0.48 pct or 122.16 points to 25,719.18 and Nifty-50 futures jumped 0.05 pct or 4 points to 7,873 by 0730 GMT.