Indian 10-year bond yields hit all time low on higher RBI easing consensus; likely to fall below 6 pct

The Indian 10-year bond yields hit all-time low Thursday on rising speculation that the Reserve Bank of India will lower its repo rate by 25 basis points to 6 percent in its next month monetary policy meeting.

Also, we foresee that the 10-year bond yield is expected to fall below 6 percent mark; going long is the ideal strategy at this point of time.

The yield on the benchmark 10-year bonds fell more than 1 basis point to 6.434 percent (hit all time low and the yield on 5-year note slid 2-1/2 basis points to 6.411 percent by 07:00 GMT.

India’s October consumer price index (CPI) Inflation fell to 14-month low to 4.20 percent m/m, compared to 4.31 percent m/m. Food Inflation came in at 3.2 percent as against 3.96 percent in September 2016. Further, cereals and products Inflation rose 4.4 percent over 4.17 percent, data released showed Tuesday.

Additionally, October wholesale price index fell unexpectedly to 3.39 percent led by easing prices of food items and non-food items, against market expectations for a rise to 3.75 percent, from 3.57 percent in the preceding month. Surprisingly lower inflation rate bolstered hopes for a December interest rate cut by the Reserve Bank of India (RBI).

Last week, the Indian central government, led by Prime Minister Narendra Modi abolished the circulation of INR500 and INR1,000 notes in order to curb black money. Further, Modi suggested the Indian citizens to exchange the respective notes from any commercial banks or nearby post office from November 10 to December 30.

The recent demonetisation drive of India government could be disinflationary in the near term and therefore strengthen the case for the Reserve Bank of India to ease in December.

The RBI next bi-monthly two-day monetary policy meeting is scheduled to be held on December 6-7. It is widely expected that the current trend of lower inflation expectations will space for the Governor Urjit Patel for further monetary easing.

Meanwhile, the Sensex fell 0.24 percent or 63.87 points to 26,234.82 and Nifty-50 futures traded 0.04 percent higher or 5 points at 8,105.25 by 07:20 GMT.