Indian bonds gain on broadening RBI easing consensus, weak December PMI lends support

The Indian government bonds gained Monday 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, weak December manufacturing PMI lent support to safe-haven buying.

The yield on the benchmark 10-year bonds, which moves inversely to its price, fell 6 basis points to 6.45 percent, the yield on long-term 30-year note also dipped 6 basis points to 7.05 percent and the yield on short-term 2-year note slid 5 basis points to 6.33 percent by 07:00 GMT.

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.

The headline seasonally adjusted Nikkei India Manufacturing Purchasing Managers’ Index (PMI) recorded below the crucial 50.0 thresholds for the first time in 2016 during December. Down from 52.3 in November to 49.6, the latest reading was indicative of a marginal deterioration in the health of the sector.

Moreover, 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, an FxWirePro Poll showed last week.

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.

India's wholesale prices rose 3.15 percent year-on-year in November, its slowest pace in five months, data released by the Indian Ministry of Commerce and Industry showed Wednesday. The data compared with a 3.12 percent annual rise forecast by economists in an FxWirePro poll.

In addition, the country’s inflation is anticipated to have eased further in coming months due to 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.

Meanwhile, the Sensex fell 0.40 percent or 105.39 points to 25,521, while Nifty-50 futures traded 0.63 percent higher or 50.80 points at 8,171 by 07:20 GMT.