Indian sovereign bonds extend losses following RBI’s hawkish policy stance; January CPI eyed

The Indian sovereign bonds extended losses Thursday after the Reserve Bank of India (RBI) surprised markets by remaining on hold at the monetary policy meeting held yesterday, while shifting to a neutral bias for the near term.

The yield on the benchmark 10-year bonds, which moves inversely to its price, jumped over 5-1/2 basis points to 6.80 percent, the yield on long-term 30-year note also surged 7 basis points to 7.20 percent while the yield on short-term 2-year note rose nearly 3 basis points to 6.49 percent by 07:00 GMT.

RBI surprised the markets by keeping rates unchanged at 6.25 percent. Market expectations were for a 25bp rate cut given falling inflation and the negative effects of demonetization. Instead, RBI viewed both factors as transient. It also shifted to a neutral stance from an accommodative one.

Further rate cuts are not ruled out but this will depend on the inflation profile which will be dictated by oil prices, INR stability, and impact the latest 7th Central Pay Commission award.

Apart from a busy state election calendar, there is considerable uncertainty over the impact of demonetization on growth. Implementation of the Goods and Services Tax (GST) is also pending for the second half of the year, reported DBS Bank in its research note.

Lastly, investors are also eyeing the INR110 billion worth of government bonds, to be auctioned by the central government on February 10 through multiple price-based auction.

Meanwhile, the 30-share benchmark Sensex traded 0.10 percent lower at 28,262.18, while the 50-share benchmark Nifty futures traded 0.15 percent or 12.75 points down at 8,756.50 by 07:10 GMT.