Indian bonds plunge after Brent hits $50 for the first time in nearly 7 months

The Indian government bonds traded lower on Thursday amid tracking firm crude oil prices, which could potentially push up domestic inflation and narrow space for monetary easing going ahead. The yield on the benchmark 10-year bonds, which moves inversely to its price rose 0.04 percent to 7.467, the yield on 15-year bonds inched higher 3 basis points (0.38 percent) to 7.919 percent and the yield on the short-term 2-year bond climbed 1 basis points to 7.212 percent by 0700 GMT.

The Indian bonds have been closely following developments in oil markets because of their impact on inflation expectations, as India imports 80 pct of its crude oil requirements. Today, crude oil prices crossed $50 mark for first time in seven months after the U.S. government reported a larger-than-expected drop in crude inventories. According to the US DOE, crude inventories decreased 4.2 million barrels, as compared to a build of +1.3 million barrels seen prior for the week ending 20 May. This came alongside an increase seen in gasoline inventories of +2.0 million barrels, from a draw of -2.5 million barrels seen prior and a decrease in distillate inventories of -1.3 million barrels, against a draw of -3.2 million barrels. The International benchmark Brent futures rose 0.70 pct to $50.09 and West Texas Intermediate (WTI) jumped 0.69 pct to $49.90 by 0630 GMT.

Moreover, investors shifted from safe-haven buying after data showed higher than expected April inflation figure and on delayed monsoon forecast for IMD, raised concerns that the Reserve Bank of India (RBI) may not be able to slash rates at the up-coming policy meeting. The India Meteorological Department (IMD) in its first monsoon forecast for 2016 said that monsoon is likely to hit Indian coast 6-days later than normal. Moreover, the India's wholesale price index (WPI) rose 0.34 pct in April (after staying in negative zone for 17 straight months), higher than the market expectation of 0.20 pct fall, from down 0.85 pct in the preceding month. Last week, the India’s retail inflation accelerated in April to 5.39 pct y/y (the fastest pace of annual expansion since January), higher than the market consensus of 5.0 pct y/y, from 4.83 pct in March. The acceleration in inflation was mainly driven by the rise in food prices, which increased more than expected to 1.4 pct m/m in April. The Reserve Bank of India had slashed its benchmark policy rate by 25 bps to 6.5 pct in April, but is widely expected to keep rates unchanged at a June 7 meeting. The RBI aims to keep inflation at 5 pct by March 2017 and lower it to 4 pct a year after that.

Meanwhile, The RBI will auction government debt worth 150 billion rupees tomorrow, including 80 billion rupees of the 7.61% 2030 bond. The RBI will set underwriting fees for the same today. The Sensex rose 0.67 pct or 172.59 points to 26,053.76 and Nifty-50 futures jumped 0.78 pct or 62 points to 8,000 by 0700 GMT.