Indian inflation signals RBI's intervention which in turn drags 10Y bonds yields to 5-month lows

Consumer prices in India increased 5.18% YoY in February of 2016, lower than 5.69% in January and below market expectations of 5.6%. Consumer inflation eased for the first time in seven months, reaching the lowest since October due a slowdown in food cost. 

Reuters reported that the benchmark 10-year yield was down three basis points at 7.57%, the lowest since Oct. 19 last year.

The Indian benchmark 10-year bond yield slumped to a near five-month low on Tuesday after data showing headline retail inflation eased in February gave rise to expectations for a cut in the central bank's key policy rate next month.

 The Reserve Bank of India is extensively expected to cut repo rate by 25 basis points when it announces its policy statement on April 5. Bonds were also lifted after the central bank said it will buy bonds up to 150 billion rupees (USD2.23 billion) on Thursday through an open market operation (OMO), which is likely to take pressure off banks facing cash shortages due to corporate tax payouts.

Since January, the RBI has conducted bond buys through OMOs for 470 billion rupees and traders expect at least one more such bond purchase given the banking system liquidity deficit is around 1.5 trillion rupees.

More instantaneously, the market will closely watch the outcome of the U.S. Federal Reserve's two-day policy meeting, beginning on Tuesday. The Fed is expected to stand pat on interest rates, and could also make clear that future hikes are on its agenda, despite concerns about global economic weakness, so long as U.S. inflation and jobs continue to strengthen.