Indian bonds trade flat ahead of CPI data, likely to rally

The Indian 10-year bond yield is unchanged on Tuesday, as investors awaits March retail inflation figure, to be released at 1300 GMT. The benchmark 10-year bonds yield, which moves inversely to its price of bonds stood at 7.41 pct as compared to 7.44 pct on Monday by 0715 GMT.

The CPI inflation is expected to fall to 5.0 pct y/y in March from 5.2 pct, driven by continued softness in food prices. If this print indeed materialises, it will likely be viewed as a ‘good’ number by markets, given it is below the RBI’s 5 pct target, from the point of view of keeping alive prospects for another rate cut by the RBI sometime later in 2016. According to our estimates the sub-5 pct prints are likely to prove temporary rather than be sustained through 2016.

“We expect Government bonds yield to be in a range of 7.4-7.7 pct. The RBI’s comment on having a neutral liquidity situation is a clear signal that there will be OMOs that will support the market. So open market operations activity will be fairly high”, said Tushar Pradhan, chief investment officer, HSBC Mutual Fund.

“From May and June, supply of government bonds will start building up as the government will start borrowing, states will start borrowing and Uday bonds will be out. There will be natural pressure on yields going up because of the sheer supply”, he added.

Lastly, we foresee that Indian government bonds are likely to gain, as investors may buy notes on expectations that the nation's retail inflation numbers, due at 1300 GMT, may boost chances of monetary easing going ahead. The yield on the benchmark 7.59 pct bond maturing in 2026 is likely to trade in a 7.39 -7.44 pct range.