Indian bonds strengthen as RBI cuts repo rate by 25bps

The Indian government bonds strengthened Wednesday after the Reserve Bank of India lowered its key policy rate by 25 basis points on Tuesday.

The yield on the benchmark 10-year bonds, which moves inversely to its price, fell 2 basis points to 6.821 percent, the super-long 30-year Treasury yield dipped 3 basis points to 7.110 percent and the 5-year note yield slid 2-1/2 basis points to 6.655 percent by 07:00 GMT.

Reserve Bank of India's two-day monetary policy review meeting which ended today saw newly appointed monetary policy committee (MPC), headed by new governor Urjit Patel announce a rate cut by 25 bps. All six of the monetary policy committee unanimously voted in favour of the rate cut.

The RBI cut the short-term lending rate by 25 basis points to 6.25 percent from 6.50 percent earlier and maintained that it would continue with its accommodative monetary stance with the objective of achieving consumer price index (CPI) inflation target of 5 percent.

The Reserve Bank of India said that the growth momentum in the economy would continue and that the seasonal surge in sensitive food times like pulses, fruits and vegetables may have peaked in July, considerably improving its near-term inflation outlook.

"Subdued momentum in food inflation in Q3 and the usual seasonal softening of food prices in early Q4, notwithstanding a reversal of base effects in March 2017, improves the near-term outlook for inflation considerably,” the RBI said in its report.

RBI expect inflation to ease to 4.7 percent by Q4 of 2016-17 and to 4.4 percent by Q2 of 2017-18, both within the Reserve Bank’s inflation target band. The forecasters 5 years ahead inflation expectations remained unchanged at 5 per cent, while 10 years ahead moved down to 4.5 per cent from 4.8 per cent.

Moreover, 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 bounced above $50 a barrel after a report that U.S. fuel inventories may have fallen for a fifth straight week. The International benchmark Brent futures rose 0.86 percent to $51.31 and West Texas Intermediate (WTI) also jumped 0.99 percent to $49.17 at 06:00 GMT.

Meanwhile, the Sensex fell 0.32 percent or 89.50 points to 28,245 and Nifty-50 futures traded 0.09 percent lower or 8.85 points at 8,794 by 07:30 GMT.