Indian bonds slump on profit taking, higher inflation numbers

The Indian government bonds plunged Monday as investors cashed in profit after a continued rally on an expectation that major global central banks would provide monetary stimulus to offset the impact on growth from Britain’s decision to leave the European Union. Also, rising inflation discouraged investors from safe-heaven buying.

The yield on the benchmark 10-year bonds, which moves inversely to its price, rose 1-1/2 basis points to 7.286 percent, the yield on 5-year bonds bounded 1-1/2 basis points to 7.133 percent and the yield on short-long 2-year bonds jumped more than 1-1/2 basis points to 6.915 percent by 07:00 GMT.

India’s wholesale price index (WPI) inflation surged to 20-month high in June, indicating that the Reserve Bank of India (RBI would not ease its key policy rate immediately. India’s wholesale prices, as measured by the wholesale price index (WPI) for the month of June, surged on rise in food and fuel prices, which has raised concerns that the Reserve Bank of India (RBI) may not be able to slash rates at the up-coming policy meeting. The RBI has targeted to reach inflation at 5 percent by March 2017, to necessitate an easing bias.

The Indian wholesale price index (WPI) inflation jumped to 1.6 percent y/y in June, higher than the market consensus of 1.19 percent, as compared to 0.79 percent in May. The rise in inflation was majorly driven by the higher price of petrol, diesel, kerosene, LPG, furnace oil and aviation turbine fuel.

Moreover, the consumer inflation rose 5.77 percent in June, a bit higher than the market consensus of 5.73 percent, as compared to 5.76 percent in May.

In addition, investors await the announcement of the new RBI chief in the Parliament. Markets anticipate the declaration of the new Governor to happen in the monsoon session of the Parliament, which is scheduled to commence from 18 July.

According to Reuters, India is likely to push back its plan to start buying back or switching government bonds to October-November from August, as New Delhi readies to pay higher staff wages from next month. The government also plans to buy back/switch 150 billion rupees of bonds in its first tranche, the official said. New Delhi has budgeted 750 billion rupees for buyback/switches this fiscal year that started April 1.

Lastly, the central is about to auction government debts worth of 150 billion rupees this week.

Meanwhile, the Sensex rose 0.58 percent or 160.71 points to 27,997.21 and Nifty-50 futures trading 0.48 percent higher or 40.85 points at 8,598 by 07:30 GMT.