Indian bonds trade lower ahead of RBI policy decision

The Indian government bonds traded lower Tuesday ahead of the Reserve Bank of India (RBI) October monetary policy meeting, which is scheduled to be released on Wednesday by 09:00 GMT.

The yield on the benchmark 10-year bonds, which moves inversely to its price, rose more than 1/2 basis points to 6.907 percent, the super-long 30-year Treasury yield jumped 1-1/2 basis points to 7.159 percent and the short-term 2-year note yield climbed 4 basis points to 6.681 percent by 07:00 GMT.

India's monetary policy committee will decide the policy interest rate at the scheduled October 4 review, and the newly-appointed external members to the panel would be at an arm’s length from the government. Also, interest rate reduction is around the corner amid expectations that inflation will decelerate further in coming months.

The upcoming Reserve Bank of India’s monetary policy meeting would be the first to be chaired by Urjit Patel. Pate is likely to continue with the existing policy as he is an insider. He has been deputy governor in charge of monetary policy under the governorship of Raghuram Rajan. But he is expected to be slightly on the dovish side as compared to Rajan, said Societe Generale in a research note. The central bank is expected to stand pat during tomorrow’s meeting.

Even if India’s headline CPI for the month of September came in at 5 percent year-on-year, below the consensus forecast, it does not mark the beginning of the disinflationary trend, which is key to the RBI opting for its next easing move, stated Societe Generale. Slowing food inflation helped pull down the headline print; however, the rise of core inflation to close to 5 percent year-on-year continues to be a concern. The next inflationary pressure is expected to come from the likely increase in consumption after the implementation of the recommendations of the 7th Pay Commission.

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 decline following rise in Iranian exports that adds to a global oversupplied market, but a OPEC agreement on production cut offered some support. The International benchmark Brent futures fell 0.45 percent to $50.66 and West Texas Intermediate (WTI) dipped 0.51 percent to $48.56 by 06:00 GMT.

Meanwhile, the Sensex rose 0.13 percent or 36.82 points to 28,280.11 and Nifty-50 futures traded 0.12 percent lower or 10.30 points at 8,775 by 07:00 GMT.