Yields drop slightly after local inflation report, US data in focus

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MUMBAI – Yields on Indian government bonds ended slightly lower on Thursday, after the local retail inflation reading came in broadly in line with expectations, while attention shifts to the US reading later in the day.

The yield on benchmark Indian government bonds ended at 7.4217%, after closing at 7.4348% on Wednesday.

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« Currently, both internal and external factors are supporting the RBI’s continued anticipation of rate hikes, » said Gaura Sen Gupta, an economist at IDFC First Bank.

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« In the event that the (US) Federal Reserve raises policy rates by 75 basis points in November, a 50 basis point hike by RBI would be more likely in December. »

India’s annual retail inflation accelerated to a five-month high of 7.41% in September, driven by soaring food prices. The reading was slightly above Reuters’ forecast of 7.3%, and well above the Reserve Bank of India’s 2% to 6% target for three consecutive quarters.

The data also implies that the central bank will now have to inform the government of why it has not met the target and what action it will have to take.

India’s consumer price-led inflation is expected to ease gradually from now on, due to falling commodity prices and lower food inflation, analysts said.

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Market participants are now looking for US retail inflation data, which could provide more clarity on the path of Fed interest rates. The Fed has already raised rates by 300 basis points since March and is expected to raise rates another 75 basis points next month.

Easing oil prices also boosted sentiment, after the benchmark Brent crude contract fell nearly 6% in the past three sessions to $92.95 a barrel. The fall in prices will have a direct impact on India’s inflation because it is one of the largest importers of the raw material.

India’s benchmark bond is currently « better positioned » than securities of other maturities, said R. Sivakumar, head of fixed income at Axis Mutual Fund, indicating that the central bank may soon hit the rate terminal in the current cycle.

“It should (over the months) act as a brake on inflation and support the currency, so I’m not very bearish on bonds now,” Sivakumar said. (Reporting by Dharamraj Lalit Dhutia; Editing by Dhanya Ann Thoppil)