Indian bonds plunge as higher inflation reduces near-term RBI easing possibilities

The Indian government bonds plunged on Tuesday after data showed higher than expected wholesale and retail inflation in May, which has raised concerns that the Reserve Bank of India (RBI) may not be able to slash rates at the up-coming policy meeting.

The yield on the benchmark 10-year bonds, which moves inversely to its price rose more than 1 basis point to 7.538 percent, yield on super-long 30-year bonds jumped more than 1/2 basis point to 7.872 percent and the yield on short-term 2-year note climbed ½ basis point to 7.101 percent by 07:00 IST.

India’s wholesale prices, as measured by the wholesale price index (WPI) for the month of May, surged on rise in food and fuel prices, which has raised concerns that the Reserve Bank of India (RBI) may not be able to slash rates at the up-coming policy meeting. The RBI has targeted to reach inflation at 5 percent by March 2017, to necessitate an easing bias.

WPI rose to 0.79 percent in May compared to a year ago period, rising above market expectations, according to government data released Tuesday. According to a poll of 10 economists, WPI was expected to come in at 0.5 percent, compared to 0.34 percent in April, recording their first gain in almost 18 months.

On the other hand, wholesale food prices rose 7.88 percent y/y in May compared to a provisional 4.23 percent y/y in April. The index for food articles group rose by 2.8 percent to 271.1 from 263.8 for the previous month while that for the non-food articles group rose by 0.4 percent to 226.4 from 225.6 for the previous month.

The index for fuel and power rose by 2.8 percent to 180.3 from 175.4 for the previous month due to higher price of furnace oil, high speed diesel and kerosene, aviation turbine fuel, petrol and bitumen.

Meanwhile, India’s consumer price index-led inflation rose 5.76 percent in May, well above expectations, from 5.39 percent in April, official data released Monday showed.

However, the south-west monsoon which hit the Kerala coast on 8 June, a week later than expected, is expected to gradually bring down food inflation. The monsoon is critical to the Kharif crop as over half of India’s farmland lacks assured irrigation and the country receives 80 percent of its annual rainfall during the four months starting in June, reports said.

In the recent bi-monthly monetary policy meeting, Reserve Bank of India Governor Raghuram Rajan made it clear that the target is to achieve five percent inflation by March 2017, while giving hints of further easing in the futures, besides concerns over upward pressure on food and commodity prices.

Meanwhile, the Sensex fell 0.13 percent or 33.60 points to 26,360.44 and Nifty-50 futures trading down 0.25 percent or 20.05 points at 8,110 by 07:00 GMT.