The fall in Indian bond yields is likely to accelerate as market is expecting a 25bps cut in the next policy meeting on next Tuesday. Moreover, pressure on the central bank is mounting for a rate cut, especially after the government stuck to the budget deficit target of 3.5% of GDP for FY17.
Meanwhile, India’s 10-year bonds yield remained unchanged at 7.50 pct on Tuesday, while 3-year bonds yield were up 0.20 pct.
This is consistent with the assessment that recent Indian economic data have improved a bit -CPI inflation moderated to 5.2% y/y in February from 5.7% y/y in January. However, given that service sector inflation remains high, it will be important to assess the tone of the monetary policy statement, as we believe that there are upside risks to the RBI's FY17 inflation target of 5%.
We foresee that the RBI will primarily focus on the domestic liquidity situation. In the recent week, systemic liquidity has tightened considerably due to the government holding back on spending and maintaining large cash balances with the RBI.
