Indian bonds mixed on weak rupee, tumbling crude

The Indian government bonds traded mixed on Thursday as the rupee deprecated after FOMC April meeting minutes from the U.S. Federal Reserve’s strengthened bets of an interest rate hike in June. On the contrary, investors were showing interest in the safe-haven buying amid tracking weak crude oil prices, which could potentially push down domestic inflation and widened space for monetary easing going ahead. The yield on the benchmark 10-year bonds, which moves inversely to its price rose 1bp to 7.483 pct and the yield on the short-term 2-year bond dipped 1bp to 7.123 pct by 0700 GMT.

The FOMC in its April 26-27 meeting minutes showed quite a hawkish view of Fed officials. This indicates that several participants believed in April that it is appropriate to raise rates in June if the incoming data indicated a rebound in the economy. On balance, these minutes go a long way in uncovering sentiment not very much reflected in the April FOMC statement. On balance, this release should go a long way in making the June meeting a live event, something that was seen as less likely in the wake of the April meeting. However, given the need for data to cooperate as the meeting approaches, nothing is certain. Nevertheless, we continue to expect only 50bps worth of tightening from the FOMC in 2016, regardless of whether or not they choose to act in June.

On the other hand, the Indian bonds have been closely following developments in oil markets because of their impact on inflation expectations, as India imports 80 pct of its crude oil requirements. Today, crude oil prices fell more than 1 pct on rising US crude inventories, a stronger dollar and surging output from Iran to Europe and Asia. The US Energy Information Administration (EIA) published data showing an unexpected 1.31 million barrel rise in US crude stocks to 541.29 million barrels. Iran’s oil exports are set to jump nearly 60 pct in May from a year ago to 2.1 million barrel per day (bpd). The rises suggest that the country’s logistical problems following years of sanctions have been overcome or were less severe than thought. Meanwhile, the International benchmark Brent futures fell 1.80 pct to $48.05 and West Texas Intermediate (WTI) declined 1.33 pct to $47.55 by 0700 GMT.

Moreover, India is scheduled to borrow 150 billion rupees through a bond auction on May 20. It will auction a similar amount of treasury bills today. Meanwhile, the rupee fell 26 paise to touch a fresh 2-month low of 67.23. The Sensex fell 0.37 pct or 99.63 points to 25,604.98 and Nifty-50 futures dipped 0.52 pct or 40.35 points to 7,842 by 0710 GMT.