Photo: Bloomberg
Photo: Bloomberg

Bond prices extend gains on slowing inflation

At 9.15am, the 10-year government bond yield fell to 7.386% from its previous close of 7.411%

Mumbai: The 10-year government bond yield on Thursday extended losses to hit a fresh eight-month low after CPI inflation dropped to a 17-month low, stoking speculation that the Reserve Bank of India may shift to a neutral policy stance. At 9.15am, the 10-year government bond yield fell to 7.386% from its previous close of 7.411%. Bond yields and prices move in opposite directions.

Retail inflation slowed down to 2.33% in November, coming within the striking distance of the lower end of the central bank’s projection, from 3.38% a month ago, according to data released by the Central Statistics Office. Core inflation declined to 5.2% in November from 5.5% in October. Factory output measured by the index of industrial production (IIP) grew at a faster clip at 8.1% in October, compared with 4.5% in the previous month.

“While it is too early to assess whether a rate cut would be forthcoming in the February 2019 MPC review, there is a significant likelihood of a change in the monetary policy stance back to neutral from calibrated tightening. This is likely to serve as a precursor to a repo rate cut in Q1 FY2020, if inflationary risks remain in check" said Aditi Nayar principal economist of ICRA Ltd.

RBI’s monetary policy committee (MPC) earlier this month slashed its inflation projection from 3.9-4.5% to 2.7-3.2% for the second half of the current fiscal. It expects inflation to quicken to 3.8-4.2% in the first half of the following year.

“We forecast a December headline inflation rate of 1.9-2% with further downside risks. That’s down from our earlier estimate of 2.1%. Our base case is now for a 25 bp rate cut in February followed by a long pause on monetary policy in 2019", Abhishek Gupta economist at Bloomberg said.

Earlier, newly appointed RBI governor Shaktikanta Das in its first briefing to media on Wednesday said that it was heartening to note that inflation was in line with the central bank’s target and that the outlook looked benign.

“Inflation targeting is an important function, which the RBI Act has mandated. It’s a mandatory part of RBI’s functioning. So that will remain very important," Das said, adding that the Act also mentions the importance of economic growth. “Maintenance of growth trajectory of Indian economy is also important." RBI kept its policy rates unchanged in the credit policy review last week and cut its inflation forecast for the rest of the fiscal, citing a sharp fall in crude oil prices and food “deflation".

The Indian rupee strengthened marginally against the US dollar, tracing gains in Asian currencies amid more signs that the US and China are finding some common ground on trade. The rupee was trading at 71.67 a dollar, up 0.48% from its previous close of 72.02.

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