FxWirePro: 2017 is likely to be a good year for Indian bonds, 10-year yields to fall to 6 pct

The Indian 10-year sovereign bond yields are expected fell to 6 percent in 2017 on rising speculation that the Reserve Bank of India (RBI) will lower its repo rate by 25 basis points to 6 percent in its next month monetary policy meeting. Also, negative demonetisation effect on domestic consumption, which contributes 60 percent to the GDP will boost safe-haven buying in 2017.

Meanwhile, the yield on the benchmark 10-year bonds, which moves inversely to its price, fell 6 basis points to 6.34 percent, the yield on long-term 30-year note dipped nearly 7 basis points to 6.88 percent and the yield on short-term 2-year note slid 3 basis points to 6.28 percent by 06:30 GMT.

It is worth noting that the benchmark 10-year yields fell nearly 160 basis points to 6.18 percent in 2016 as subdued inflation and demonetisation raised expectations for the RBI rate cut. We at FxWirePro expect this is also likely to continue even in 2017.

The country’s inflation is anticipated to have eased further in coming months due to the failure of demonetisation. This masterstroke brought in a pool of electronic transactions that deprived many of hand-to-hand cash exchanges, thus leaving the citizens in a wide array of lower spends overall.

The lower spread of cash transactions, coupled with a maximum limit on ATM withdrawals has pressurised the prices of many retail commodities, including luxuries and real estate prices as well.

Moreover, the manufacturing sector of the Indian sub-continent dropped below the 50-point neutral mark for the first time in 2016 amid a cash crunch scenario and as output, as well as new orders, dipped during the month of December. Further, companies have reduced their buying levels as input cost accelerated during the period.

In addition, inflation continued to remain subdued during the month of November, exerting deeper pressure on the Reserve Bank of India (RBI) to undertake easing policy in the next 2-day bi-monthly monetary policy scheduled to be held on February 7.

India’s consumer prices tumbled in November because of weak food prices. Consumer price inflation in India slowed to 3.63 percent year-on-year in November, owing to the drops in prices of food. The downward surprise was mainly because of fruits and vegetables. Additionally, India’s wholesale price inflation fell during the month of November, at the slowest pace in five months. However, it came in higher than what market participants had priced in initially.

Meanwhile, the Sensex rose 0.27 percent or 72 points to 26,667 and the Nifty-50 futures traded 0.36 percent higher or 29.40 points at 8,220 by 07:00 GMT.