Indian bonds steady in subdued trade, FOMC eyed

The Indian government bonds traded nearly flat on Wednesday as markets receive little data of great significance. Also, investors await Fed policy decision and Fed Chair Yellen’s post-statement press conference.

The yield on the benchmark 10-year bonds, which moves inversely to its price hovered around 7.51 percent mark by 07:00 GMT.

The FOMC (Federal Open Market Committee) of Federal Reserve is quite unlikely to announce an increase of interest rates in Wednesday’s meeting. On balance, markets look to see how the FOMC is interpreting recent data weakness (particularly employment) and how it may alter intentions to raise rates further in 2016.

In many respects, the December move to raise rate was viewed simply as the Fed looking to get the show on the road, allowing them to possibly maintain a shallow rate trajectory as they move towards more normal policy. Hence, clear focus will on Federal Reserve Chair Janet Yellen's speech in an attempt to estimate the Fed's likely next step to raise interest rate.

On Tuesday, India’s wholesale prices, as measured by the wholesale price index (WPI) for the month of May, surged on rise in food and fuel prices, which has raised concerns that the Reserve Bank of India (RBI) may not be able to slash rates at the up-coming policy meeting. The RBI has targeted to reach inflation at 5 percent by March 2017, to necessitate an easing bias.

WPI rose to 0.79 percent in May compared to a year ago period, rising above market expectations, according to government data released Tuesday. According to a poll of 10 economists, WPI was expected to come in at 0.5 percent, compared to 0.34 percent in April, recording their first gain in almost 18 months.

On the other hand, wholesale food prices rose 7.88 percent y/y in May compared to a provisional 4.23 percent y/y in April. The index for food articles group rose by 2.8 percent to 271.1 from 263.8 for the previous month while that for the non-food articles group rose by 0.4 percent to 226.4 from 225.6 for the previous month.

The index for fuel and power rose by 2.8 percent to 180.3 from 175.4 for the previous month due to higher price of furnace oil, high speed diesel and kerosene, aviation turbine fuel, petrol and bitumen.

Meanwhile, India’s consumer price index-led inflation rose 5.76 percent in May, well above expectations, from 5.39 percent in April, official data released Monday showed.

However, the south-west monsoon which hit the Kerala coast on 8 June, a week later than expected, is expected to gradually bring down food inflation. The monsoon is critical to the Kharif crop as over half of India’s farmland lacks assured irrigation and the country receives 80 percent of its annual rainfall during the four months starting in June.

Meanwhile, the Sensex rose 0.47 percent or 125.19 points to 26,520.90 and Nifty-50 futures trading down 0.29 percent or 23.45 points at 8,147 by 07:00 GMT.