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

The Indian government bonds gained Wednesday 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 PMIs lent support to safe-haven buying.

The yield on the benchmark 10-year bonds, which moves inversely to its price, fell 4-1/2 basis points to 6.40 percent, the yield on long-term 30-year note also dipped 5-1/2 basis points to 6.95 percent and the yield on short-term 2-year note slid 1 basis point to 6.32 percent by 07:00 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 negative demonetisation raised expectations for the RBI rate cut. We at FxWirePro expect this is also likely to continue even in 2017.

The seasonally adjusted headline Nikkei India Services Business Activity Index registered 46.8 in December, little-changed from November’s reading of 46.7 and indicating a further solid contraction in output. Moreover, the downturn was broad-based by sub-sector, with Hotels & Restaurants firms the worst performers.

Additionally, 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.

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.

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.

In addition, 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.

Meanwhile, the Sensex traded flat at 25,650, while Nifty-50 futures traded 0.16 percent higher or 12.95 points at 8,204 by 07:20 GMT.