Government bonds cheered the lower-than-expected inflation print released on Friday and rallied to its highest level in a month, as concerns over an immediate interest rate increase by the Reserve Bank of India faded. In April, hawkish comments by one of the members of the RBI’s monetary policy committee in the minutes of the meeting had spooked the market and raised the spectre of an impending rate hike. Michael Patra, executive director, RBI, had suggested that a pre-emptive 25 basis points increase in the policy rate will help achieve the central bank’s inflation target of 4%.
On Monday, the yield on the 10-year benchmark paper fell 10 basis points over Friday to end at 6.81%, its lowest since April 12. The yield on the new 10-year paper closed at 6.63%, lower than the cut-off yield of 6.79% at Friday’s auction. Trading volume for the new 10-year bond stood at Rs 12,560 crore at the end of the session, marginally lower than Rs 14,410 crore for the existing benchmark. Traders said the trading volume was higher than usual for a new paper, and the rally in the market led to high volumes.
Foreign portfolio investors, too, have continued to invest in Indian debt and have bought bonds worth $1.1 billion so far in May. “It has definitely soothed the market’s nerve. CPI inflation has come much below what we were expecting. It has done away with the need for any pre-emptive action, at least in the near-term,” said Debendra Dash, head ALM, Au Small Finance Bank. Consumer price inflation (CPI) for April was 2.99%, lower than 3.89% in March, according to the government data. Economists were expecting the number to come in at around 3.45%.
“Core CPI inflation also inched lower to 4.4% from 4.84%. While we expect around 50 basis points of downside to RBI’s March 2018 estimate of 5%, the headline inflation is likely to still remain higher than the medium-term target of 4%,” Kotak Economic Reserach said in a note. It expects the RBI to be on a wait and watch mode in FY18. For this week, Kotak expects the new 10-year paper to trade in the range of 6.62-6.72%, while the old benchmark paper is likely to trade in the range of 6.78-88%.
Traders continue to be cautious and are keenly awaiting the RBI’s monetary policy review in June for further clarity on the rate action. “Friday’s inflation number will surely postpone any increase in the repo rate, but it is too soon to comment on whether the RBI will consider not raising rates at all. It will want to look at more data points,” a trader with a private bank said. “Unless the RBI gives a clear sign, the market will expect a rate hike. However, with Friday’s data, we have more time on hand.”