Indian bonds rally on RBI’s further easing hopes; ideal time to go long

The Indian government bonds rallied Tuesday as lower inflation due to normal rainfall after three successive years offered space to the Reserve Bank of India to lower the repo rate further in its upcoming monetary policy meeting.

Also, we foresee that the 10-year bond yield is expected to fall below 6.70 percent mark; going long is the ideal strategy at this point of time

The yield on the benchmark 10-year bonds, which moves inversely to its price, fell 2-1/2 basis points to 6.819 percent, the yield on super-long 30-year note slid 1-1/2 basis points to 7.193 percent and the yield on short-term 3-year note tumbled more than 1 basis point to 6.584 percent by 07:00 GMT.

According to latest Reuters poll, majority of the economist expects the RBI to cut repo rate by 25 basis points to 6.0 percent in the first quarter of 2017. Also, economy to grow 7.7 percent in fiscal year ending 2017 and CPI forecast to average 5.1 percent in fiscal year 2016/17, as compared to previous 5.4 percent in July poll.

Last week, wholesale prices in India rose during the month of September at a pace slower than what markets had initially anticipated. India’s annual rate of inflation based on wholesale prices eased on a month-on-month basis to 3.57 percent in September from 3.74 percent in August. The annual wholesale inflation during the corresponding period last year stood at -4.59 percent.

After rising for the first time in April following 17 straight months of contraction, the Wholesale Price Index (WPI) has cumulatively risen by 4.28 percent in the current fiscal up to September. Meanwhile, wholesale food prices last month rose 5.75 percent year-on-year, compared with a provisional 8.23 percent gain in August.

Moreover, with India receiving 97 percent rainfall between June and September, the monsoon was "normal" this year, the India Meteorological Department (IMD) said on Thursday.

The Reserve Bank of India in its two-day monetary policy meeting held last Tuesday, saw newly appointed monetary policy committee (MPC), headed by new governor Urjit Patel announce a rate cut by 25 basis points. All six of the monetary policy committee unanimously voted in favour of the rate cut.

Lastly, the Indian bonds have been closely following developments in oil markets because of their impact on inflation expectations, as India imports 80 percent of its crude oil requirements. Crude oil prices clawed back minor gains in early Asia trade Tuesday following an overnight decline but trading is expected to be muted now that the market has priced in a potential production cut. The International benchmark Brent futures rose 0.74 percent to $51.90 and West Texas Intermediate (WTI) jumped 0.76 percent to $50.32 by 06:40 GMT.

Meanwhile, the Sensex rose 0.91 percent or 251.74 points to 27,783 and Nifty-50 futures traded 0.79 percent higher or 67.30 points at 8,598 by 07:10 GMT.