Indian bonds slump as monsoon forecast cheers equities

The Indian bonds prices edged down, sending yields higher on Wednesday as investors cooled on safe-haven assets after key Indian stock market indices were trading significantly higher, cheered by the news a day earlier from official agencies that factory output was back on the growth path, retail inflation has fallen further and rains this monsoon season will be bountiful.

The yield on the benchmark 10-year Treasury note which moves inversely to its price, moved higher 0.03 pct to 7.419 pct and the yield on the 3-year Treasury bond ticked up 0.15 pct to 7.268 pct by 0810 GMT.

The Sensex rose 409.29 points or 1.63% to settle at 25,554.88, its highest closing level since 4 April 2016 and the Nifty-50 futures rose 102.50 points or 1.32% to settle at 7,867, its highest closing level since 4 April 2016 by 0825 GMT.

Yesterday, the India Meteorological Department (IMD) said that after two straight years of drought, India is likely to be showered with above-normal rains during the upcoming monsoon season, with a probability of more than 94 pct precipitation on Tuesday.

On the other hand, India’s CPI inflation decelerated to 4.8% y/y in March, as compared with consensus forecast of 5%. Food inflation, which decelerated to 5.4%, mainly drove the decline in CPI inflation, but ‘fuels and light’ also helped in good measure.

“We expect inflation to hover around 5% the next few months with another dip sub-5% likely”, said ANZ.

“The central bank is expected to keep the policy on hold through this year, but might lower rate one last time if monsoon rains are favourable enough to keep food inflation sustainably lower and growth continues to be weak”, ANZ added in its report.

Lastly, we foresee that Indian government bonds are likely to gain, as investors may buy notes on expectations that the Reserve bank of India may go for further monetary easing in 2016.