Lower inflation drives Indian sovereign bonds higher, widens space for another December repo rate cut

The Indian government bonds continued to rally Wednesday after recent data showed that the country’s inflation eased in October, creating wider space for the Reserve Bank of India (RBI) for another Repo Rate cut.

The yield on the benchmark 10-year bonds fell 10-1/2 basis points to 6.429 percent (hit an all-time low), the yield on long-term 30-year note dipped 7-1/2 basis points to 6.952 percent and the yield on short-term 3-year note slid 5-1/2 basis points to 6.255 percent by 07:00 GMT.

India’s October consumer price index (CPI) Inflation fell to a 14-month low of 4.20 percent m/m, compared to 4.31 percent m/m. Food Inflation came in at 3.2 percent as against 3.96 percent in September 2016. However, cereals and products inflation rose 4.4 percent over previous 4.17 percent, data released showed Tuesday.

Additionally, October wholesale price index fell unexpectedly to 3.39 percent led by easing prices of food items and non-food items, against market expectations for a rise to 3.75 percent, from 3.57 percent in the preceding month. Surprisingly lower inflation rate bolstered hopes for a December interest rate cut by the Reserve Bank of India (RBI).

Last week, the Indian central government, led by Prime Minister Narendra Modi abolished the circulation of INR500 and INR1,000 notes in order to curb black money. Further, Modi suggested the Indian citizens to exchange the respective notes from any commercial banks or nearby post offices from November 10 to December 30.

The recent demonetisation drive of India government could prove to be disinflationary in the near term and therefore strengthen the case for the Reserve Bank of India to ease in December.

The RBI's next bi-monthly two-day monetary policy meeting is scheduled to be held on December 6-7. It is widely expected that the current trend of lower inflation expectations will space for Governor Urjit Patel to undertake further monetary easing.

Meanwhile, the Sensex rose 0.93 percent or 245.82 points to 26,550.45 and Nifty-50 futures traded 0.66 percent higher or 55.40 points at 8,181.25 by 07:20 GMT.