Indian sovereign bonds remain unpredictable ahead of January CPI data

The Indian sovereign bonds traded in a weird fashion Monday as investors wait to read the January consumer price inflation data, scheduled to be released later in the day.

The yield on the benchmark 10-year bonds, which moves inversely to its price, fell nearly 1/2 basis point to 6.80 percent, the yield on long-term 19-year note jumped 2 basis points to 7.53 percent while the yield on short-term 2-year note slumped 2 basis points to 6.49 percent by 08:00 GMT.

The country’s headline inflation is expected to stay steady at 3.4 percent y/y. This will reinforce expectations that March 2017 inflation will stay below the targeted 5 percent mark. The highly-weighted food component likely fell by a smaller extent in January, as perishable costs stabilised from the easing cost crunch.

However, the still relatively subdued food inflation will yet again overwhelm firmer fuel and transport costs on the back of higher global crude prices. Retail fuel prices were up an average 25 percent y/y in January this year, DBS reported.

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.

Meanwhile, the 30-share benchmark Sensex traded 0.31 percent lower at 28,246.59, while the 50-share benchmark Nifty futures traded 0.15 percent or 12.85 points down at 8,780.85 by 08:00 GMT.