Indian bonds close higher as Fed holds rate steady

The Indian government bonds closed higher Thursday as the US Federal Reserve left interest rates unchanged and signalled a more gradual hiking path than previously projected.

The yield on the benchmark 10-year bonds, which moves inversely to its price fell more than 1-1/2 basis points to 7.506 percent.

Moreover, the Federal Open Market Committee left fed funds rate unchanged in a 0.25-0.50 percent range, as expected. One key highlight of the statement was the note that the pace of improvement in the labour market has slowed while growth in economic activity appears to have picked up, adding that although the unemployment rate has declined, job gains have diminished.

Also, FOMC diminished outlook for growth coupled with largely downgraded forecasts for the overnight rate, though median expectations remain unchanged for 50 basis points worth of tightening in 2016.

The June statement reiterated that inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Additionally, the June statement repeated that inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labour market strengthens further. In terms of risks, the Committee continues to closely monitor inflation indicators and global economic and financial developments.

In addition, the Indian bonds have been closely following developments in oil markets because of their impact on inflation expectations, as India imports 80 percent of its crude oil requirements. Today, crude oil tumbled more than 1 percent for six straight days, dragged by a somewhat disappointing U.S. oil data and looming risk of Britain’s departure from the European Union. The American Petroleum Institute (API) showed U.S. crude inventories rose by 1.2 million barrels in the week to June 10 to 536.7 million, against market consensus for a decrease of 2.3 million barrels. The International benchmark Brent futures fell 1.08 percent to $48.44 and West Texas Intermediate (WTI) dipped 1 percent to $47.53 by 07:25 GMT.

However, the south-west monsoon which hit the Kerala coast on 8 June, a week later than expected, is expected to gradually bring down food inflation. The monsoon is critical to the Kharif crop as over half of India’s farmland lacks assured irrigation and the country receives 80 percent of its annual rainfall during the four months starting in June.

Meanwhile, the Sensex closed lower 0.81 percent or 211.79 points to 26,514.55 and Nifty-50 futures closed down 0.80 percent or 65.90 points at 8,151.25.