Home / Markets / Stock Markets /  India bond yields fall but sticky core inflation limits gains

Indian government bond yields fell today after domestic inflation for November eased within the Reserve Bank of India's target range for the first time this year. The benchmark 10-year yield fell to 7.258%, after settling at 7.2938% on Monday. Bond yields had risen 10 basis points in previous six sessions. On the back of a moderation in food prices, data released on Monday showed retail inflation rose lower-than-expected 5.88% in November, from 6.77% in the previous month. In comparison, analysts had expected the reading at 6.40%.

Bond traders now await US inflation data due later in the day and the Federal Reserve policy decision on Wednesday. The Fed is expected to hike its interest rate by 50 basis points, after raising the same by 375 bps since March.

In India, data released yesterday however showed core inflation remained sticky between 6% and 6.26% in November, according to three economists' estimates, versus 5.9% to 6.3% in October. And this could prevent a major fall in yields, they said. 

Bond markets came under pressure last week amid robust economic data in the US and a hawkish RBI MPC meeting. 

“November PPI in the US came in higher than expectations at 7.4% and University of Michigan’s consumer sentiment index improved above expectations. Consequently, the 2-year and 10-year Treasury yields rose by 7 bps and 9 bps, respectively, on a wow basis. Crude oil prices slipping below US$80/bbl (amid the start of the G-7 price cap on Russian oil) did little to aid sentiments. Domestically, the 10-year benchmark (7.26% GS 2032) tracked cues from rising US Treasury yields, despite softening crude oil prices, increasing by 8 bps to 7.3% on a wow basis. We expect the 10-year benchmark to trade in the range of 7.20-7.40% ahead of the US FOMC meeting this week," Kotak Mahindra Bank analysts said in a note. 

Meanwhile, annual industrial output contracted 4% in October, its weakest performance in 26 months, after revised growth of 3.5% in September. Analysts polled by Reuters had expected expansion of 0.3%.

“While moderation in headline index is positive, sticky core inflation at 6.28% remains a concern which RBI also discussed in their policy announcement this month. Further, IIP contracted to 4% in October indicating lower factory output. It will have to be seen how RBI's future policy actions take into account these factors in their effort to curb inflation durably while maintaining growth," said Vivek Goel, Joint Managing Director, Tailwind Financial Services. 

“With the Fed's policy announcement due soon, it will be interesting to see whether they echo a similar reduction in rate hike as done by RBI and help support markets amidst global growth concerns. We believe that even though headline inflation has come off, core inflation continues to remain sticky and it will be an important input for the future course of monetary policy," he added. (With Agency Inputs)

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