Indian sovereign bonds rebound on short-covering, investors eye January CPI

The Indian sovereign bonds rebounded Friday as investors covered previous short positions. Also, dealers are eyeing the INR110 billion worth of government bonds, to be auctioned by the central government later in the day through multiple price-based auction.

The yield on the benchmark 10-year bonds, which moves inversely to its price, plunged nearly 8 basis points to 6.77 percent, the yield on long-term 24-year note fell 1/2 basis point to 7.53 percent while the yield on short-term 2-year note slumped 6 basis points to 6.50 percent by 07:40 GMT.

RBI surprised the markets by keeping rates unchanged at 6.25 percent. Market expectations were for a 25bp rate cut given falling inflation and the negative effects of demonetization. Instead, RBI viewed both factors as transient. It also shifted to a neutral stance from an accommodative one.

Further rate cuts are not ruled out but this will depend on the inflation profile which will be dictated by oil prices, INR stability, and impact the latest 7th Central Pay Commission award.

Apart from a busy state election calendar, there is considerable uncertainty over the impact of demonetization on growth. Implementation of the Goods and Services Tax (GST) is also pending for the second half of the year, reported DBS Bank in its research note.

Lastly, investors are also awaiting the consumer price inflation data for the month of January, scheduled to be released on February 13.

Meanwhile, the 30-share benchmark Sensex traded 0.12 percent higher at 28,357.41, while the 50-share benchmark Nifty futures traded 0.16 percent or 13.65 points up at 8,792.45 by 07:40 GMT.