Indian bonds plunge after RBI keeps policy rate steady

The Indian government bonds plunged Tuesday after Reserve Bank of India (RBI) left the repo rate unchanged in the second bi-monthly monetary policy.

The yield on the benchmark 10-year bonds, which moves inversely to its price rose more than ½ basis point to 7.480 percent, yield on super-long 30-year bonds jumped 1-1/2 basis point to 7.852 percent and the yield on short-term 2-year note climbed ½ basis point to 7.103 percent by 07:00 GMT.

Governor Raghuram Rajan kept rates on hold at 6.5 percent in the apex bank’s bi-monthly monetary policy review. The central bank had last cut the repo rate by 25 basis points from 6.75 percent to 6.50 percent in the first bi-monthly monetary policy review on April 5. He said that higher upside risks to 'inflation trajectory' posit for keeping the rates unchanged, but said the central bank will remain accommodative provided data are supportive.

The RBI’s decision came in against a backdrop of higher retail inflation in April, a likelihood of the Fed to raise interest rates later this month and required clarity on the timely outburst of monsoon. Retail inflation, measured by the consumer price index (CPI), jumped to 5.39 percent in April 2016, against 4.83 percent in the previous month. For the RBI, CPI is the nominal anchor for making monetary policy.

According to recent Reuters' poll of economists said the central bank may cut the repo rate by 25 basis points between July and September, also depending on monsoon progress. Moreover, investors will look forward to the U.S. Federal Reserve’s policy review on June 14 -15, even though expectations of a rate increase have faded after the nation’s latest employment report was much weaker than expected.

Moreover, 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 prices continue to hover at $50 mark. The International benchmark Brent futures fell 0.02 percent to $50.53 and West Texas Intermediate (WTI) rose 0.04 percent to $49.71 by 06:40 GMT.

In addition, India Meteorological Department (IMD) in its last week announcements, forecast that India to receive ‘above normal’ rainfall in 2016 at 106 percent of the Long Period Average (LPA), easing concerns that food inflation is set to bounce in a nation that has suffered two consecutive years of drought.

Meanwhile, the Sensex rose 0.61 percent or 167.33 points to 26,944.78 and Nifty-50 futures trading bounced 0.93 percent or 76.85 points at 8,306.75 by 07:00 GMT.