Indian sovereign bonds slide on profit-booking, investors shrug off lower-than-expected CPI

Indian sovereign bonds fell during the early trading session Friday, as investors cashed in profits on the last trading day of the week after relishing previous gains, observing a relatively subdued trading session. Also, market participants have shrugged off lower-than-expected consumer inflation data released on Thursday.

The yield on the benchmark 10-year bonds, which moves inversely to its price, rose nearly 2-1/2 basis points to 6.40 percent, the yield on long-term 30-year note also surged 2 basis points to 7.04 percent while the yield on short-term 2-year note inched 1/2 basis point higher to 6.32 percent by 08:00 GMT.

Retail inflation rose 3.41 percent in December from a year earlier, against 3.63 percent in November. The lower spread of cash transactions, coupled with a maximum limit on ATM withdrawals has pressurized the prices of many retail commodities, including luxuries and real estate prices as well.

It is worth noting that the benchmark 10-year yields fell nearly 160 basis points to 6.18 percent in 2016 as subdued inflation and the negative impact of demonetisation raised expectations for the RBI rate cut. We at FxWirePro expect this is also likely to continue even in 2017.

The Indian government bonds have been closely tracking developments in the United States’ money market. The U.S. benchmark 10-year bond yields jumped 8 basis points to 2.38 percent, from yesterday’s low of 2.30 percent.

A separate data also showed that India's industrial output in November rose 5.7 percent from a year earlier, the biggest annual expansion since October 2015, driven by a sharp recovery in production of capital goods and higher electricity output. The reading rebounded from October’s revised decline of 1.8 percent and sharply exceeded the 1.3 percent median estimate of the annual rate of expansion in a Reuters’s poll of economists.

Lastly, markets now look forward to the release of wholesale price inflation data on January 16, Monday for further direction in the bond market.

Meanwhile, the 30-share benchmark Sensex traded 0.11 percent lower at 27,210.84, while the 50-share benchmark Nifty futures traded 0.31 percent or 25.95 points lower at 8,380.60 by 08:15 GMT.