Indian sovereign bonds trade narrowly mixed ahead of RBI’s monetary policy meeting

The Indian sovereign bonds traded narrowly mixed Monday as investors await to watch the Reserve Bank of India’s (RBI) first 2-day bi-monthly monetary policy meeting of 2017, scheduled to be held on February 7-8. However, bonds traded slightly on the upside in the early trading session, as U.S. monthly jobs data, released on Friday has strongly challenged any rate hike plans in March

The yield on the benchmark 10-year bonds, which moves inversely to its price, fell 1/2 basis point to 6.40 percent, the yield on long-term 30-year note hovered around 7.05 percent while the yield on short-term 3-year note rose 1 basis point to 6.31 percent by 07:00 GMT.

A conservative fiscal policy, easing inflation trajectory and short-term risks to growth keep the door open for a further easing by the RBI. But it will be a close call. As a base case, we look for a 25 basis points rate cut in the repo rate to 6.0 percent on Wednesday.

Since the December policy meeting, CPI inflation is well-contained. Decemebr inflation eased to 3.4 percent y/y, easing from 5.2 percent in the third-quarter. January inflation, due later this month, is also expected to stay at sub-4.0 percent as food prices remain tame.

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.

Meanwhile, the 30-share benchmark Sensex traded 0.70 percent higher at 28,437.12, while the 50-share benchmark Nifty futures traded 0.74 percent or 64.30 points up at 8,805.50 by 07:10 GMT.