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Indian bonds sag on profit booking; next week’s RBI bi-monthly monetary policy in focus

The Indian government bonds slumped Friday as investors cashed in profits after a long rally following hopes of a rate cut by the Reserve Bank of India (RBI) in its December 7 monetary policy meeting.

The yield on the benchmark 10-year bonds, which moves inversely to its price, rose 2 basis points to 6.23 percent, the yield on long-term 30-year note climbed 1-1/2 basis points to 6.68 percent and the yield on short-term 2-year note bounced 3 basis points to 6.00 percent by 07:00 GMT.

The Indian bonds have been closely following developments in the U.S. debt market. The United States benchmark 10-year Treasury yield climbed to 2.43 percent, highest since July last year.

Economic growth in India during the second quarter of fiscal year 2017 rose, albeit lower than market expectations, following upbeat performance in the service sector, the country’s major contributor to gross domestic product. Also, higher consumption demand added to the rise.

The economic activities which registered growth of over 7.0 percent in Q2 of 2016-17 over Q2 of 2015-16 are ‘Public administration, defence & other services’, 'financial, insurance, real estate and professional services', ‘manufacturing’ and ‘trade, hotels and transport & communication and services related to broadcasting’.

Moreover, the recent demonetisation drive of India government could be disinflationary in the near term and therefore strengthen the case for the Reserve Bank of India to ease in December.

The RBI next bi-monthly two-day monetary policy meeting is scheduled to be held on December 6-7. It is widely expected that the current trend of lower inflation expectations will space for the Governor Urjit Patel for further monetary easing.

Lastly, 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.

Crude oil prices fell more than 1 percent as investor booked profit after a long rally post-OPEC deal. The International benchmark Brent futures fell 1.09 percent to $53.35 and West Texas Intermediate (WTI) dipped 0.80 percent to $50.65.

Meanwhile, the Sensex fell 0.77 percent or 204.09 points to 26,355, while Nifty-50 futures traded 0.96 percent lower or 78.60 points at 8,130 by 07:30 GMT.

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