Indian government bond yields are anticipated to rise slightly on Tuesday, following domestic retail inflation figures that met market expectations. This follows a surge in investor activity on Monday, driven by the anticipation of a lower inflation rate.
The benchmark 10-year bond yield is projected to fluctuate between 7.10% and 7.15%, marginally higher than its previous close of 7.1157%. According to a trader from a state-run bank, the market reaction stems from the inflation data being a “non-event,” prompting traders who had positioned themselves for a lower inflation reading to adjust their holdings.
In April, India’s annual retail inflation rate eased slightly to 4.83% from 4.85% in March, primarily due to reduced fuel prices. However, food prices remained high. A Reuters poll had predicted an inflation rate of 4.80% for April. Core inflation, which excludes volatile food and energy prices, was estimated to be 3.23% in April, down slightly from March’s range of 3.3% to 3.4%, according to two economists. Notably, the Indian government does not publish core inflation figures.
Looking ahead, Barclays forecasts retail inflation for May to rise to 5.0%. Economist Shreya Sodhani from Barclays noted, “The momentum in domestic growth is still relatively robust, so the central bank likely sees little reason for monetary easing at this time. We expect the Monetary Policy Committee (MPC) to begin with rate cuts in the fourth quarter of 2024, leaning more towards a December cut rather than October.”
Market participants will now shift their focus to the upcoming US inflation data, due on Wednesday. The expected reading for the 12 months to April is 3.6%, a slight decrease from 3.8% in March, based on a Reuters poll. The US 10-year yield continues to hover around the critical 4.50% mark.
Additionally, traders will be closely monitoring the Indian government’s second bond buyback within two weeks, scheduled for Thursday. The government aims to purchase bonds worth up to 600 billion rupees ($7.19 billion), which could have significant implications for the bond market.
In summary, the expected rise in Indian government bond yields reflects the market’s response to in-line inflation data and ongoing economic conditions. The central bank’s stance on monetary policy remains cautious, with future rate cuts projected for late 2024. Investors will be watching both domestic and international economic indicators closely in the coming weeks.
