Indian bonds slump on Fed rate hike hopes; RBI easing expectations limit yields growth

The Indian government bonds slumped Friday as investors moved away from the safe-haven buying amid following weakness in the U.S. Treasuries.

The Federal Reserve Chair Janet Yellen in her testimony to the Joint Economic Committee (JEC) of Congress said that there is a higher possibility for an interest rate hike in December.

Also, the rising expectations of the Reserve Bank of India December rate cut in the wake of lower inflation limited the growth in bond yields.

Also, we foresee that the 10-year bond yield is expected to fall below 6 percent mark; going long is the ideal strategy at this point of time.

The yield on the benchmark 10-year bonds, which moves inversely to its price, rose 1 basis point to 6.427 percent, the long-term 30-year bond yield climbed 2-1/2 basis points to 6.954 percent and the yield on 5-year note bounced 1 basis points to 6.411 percent by 07:00 GMT.

Federal Reserve Chair Janet Yellen, in her congressional testimony, strengthened bets that the central bank was on the right path to hike interest rates in December. This was the first direct signal from the Fed after December last year.

Moreover, India’s October consumer price index (CPI) Inflation fell to 14-month low to 4.20 percent m/m, compared to 4.31 percent m/m. Food Inflation came in at 3.2 percent as against 3.96 percent in September 2016. Further, cereals and products Inflation rose 4.4 percent over 4.17 percent, data released showed Tuesday.

Additionally, October wholesale price index fell unexpectedly to 3.39 percent led by easing prices of food items and non-food items, against market expectations for a rise to 3.75 percent, from 3.57 percent in the preceding month. Surprisingly lower inflation rate bolstered hopes for a December interest rate cut by the Reserve Bank of India (RBI).

Last week, the Indian central government, led by Prime Minister Narendra Modi abolished the circulation of INR500 and INR1,000 notes in order to curb black money. Further, Modi suggested the Indian citizens to exchange the respective notes from any commercial banks or nearby post office from November 10 to December 30.

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.

Meanwhile, the Sensex rose 0.17 percent or 38.23 points to 26,265.85, while Nifty-50 futures traded 0.11 percent lower or 10 points at 8,090 by 07:20 GMT.